Legislature(1993 - 1994)
05/13/1994 09:00 AM House STA
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE STATE AFFAIRS STANDING COMMITTEE
May 13, 1994
9:00 a.m.
MEMBERS PRESENT
Representative Al Vezey, Chairman
Representative Pete Kott, Vice Chairman
Representative Jerry Sanders
Representative Fran Ulmer
Representative Gary Davis
Representative Bettye Davis
Representative Harley Olberg
MEMBERS ABSENT
None
OTHER LEGISLATORS PRESENT
Representative Gail Phillips
Representative Cliff Davidson
Representative Brian Porter
Representative Joe Green
Representative John Davies
Representative Jim Nordlund
Representative Jeannette James
Representative Bill Hudson
Representative Joe Sitton
Representative Con Bunde
Representative Gene Therriault
Representative Tom Brice
COMMITTEE CALENDAR
SB 377: "An Act relating to state agency fiscal
procedures, including procedure related to the
assessment and collection of certain taxes; and
providing for a effective date."
HEARD AND HELD
WITNESS REGISTER
BRUCE BOTELHO, Attorney General
State of Alaska
Department of Law
P.O. Box 110300
Juneau, Alaska 99811-0300
Phone: 465-3600
POSITION STATEMENT: Testified in favor of SB 377
SPENCER HOSIE, Legal Counsel for the
Department of Law
510 L Street
Anchorage, Alaska 99501
Phone: None Given
POSITION STATEMENT: Testified in favor of SB 377
RICHARD BREWER, Assistant Director, Technical
Oil and Gas Audit Division
Department of Revenue
15021 Longbow
Anchorage, Alaska 99516
Phone: 276-1363
POSITION STATEMENT: Testified in favor of SB 377
PAUL SULLIVAN, General Tax Counsel
Exxon Corporation, USA
240 Main Street
Juneau, Alaska 99801
Phone: 463-2577
POSITION STATEMENT: Testified in opposition to SB 377
PREVIOUS ACTION
BILL: SB 377
SHORT TITLE: STATE AGENCY FISCAL PROCEDURES
SPONSOR(S): FINANCE
JRN-DATE JRN-PG ACTION
04/13/94 3633 (S) READ THE FIRST TIME/REFERRAL(S)
04/13/94 3633 (S) FINANCE
04/13/94 3650 (S) FIN WAIVED UNIFORM RULE 23
04/14/94 (S) FIN AT 09:00 AM SENATE FIN 518
04/20/94 (S) RLS AT 06:45 PM FAHRENKAMP
ROOM 203
04/21/94 3839 (S) FIN RPT CS 6DP 1DNP SAME TITLE
04/21/94 3839 (S) FN TO SB & CS PUBLISHED (ADM)
04/21/94 3839 (S) ZERO FN TO SB & CS PUBLISHED
(REV)
04/21/94 (S) FIN AT 10:00 AM SENATE FIN 518
04/21/94 (S) RLS AT 2:15 PM FAHRENKAMP
RM 203
04/22/94 3870 (S) RLS RPT 3CAL 1NR 4/22/94
04/22/94 3876 (S) READ THE SECOND TIME
04/22/94 3877 (S) FIN CS ADOPTED Y12 N8
04/22/94 3877 (S) AM NO 1 MOVED BY KERTTULA
04/22/94 3882 (S) QUESTION: AM NO 1 GERMANE?
04/22/94 3883 (S) AM NO 1 GERMANE Y17 N3
04/22/94 3883 (S) AM NO 1 ADOPTED Y14 N6
04/22/94 3883 (S) AM NO 2 MOVED BY DONLEY
04/22/94 3884 (S) AM NO 2 FAILED Y9 N11
04/22/94 3884 (S) ADVANCED TO THIRD READING UNAN
CONSENT
04/22/94 3884 (S) READ THE THIRD TIME
CSSB 377(FIN) AM
04/22/94 3884 (S) PASSED Y16 N4
04/22/94 3885 (S) EFFECTIVE DATE PASSED Y17 N3
04/22/94 3885 (S) Pearce NOTICE OF
RECONSIDERATION
04/22/94 3885 (S) TAKE UP RECON ON SAME DAY
WITHDRAWN
04/22/94 3937 (S) RECON TAKEN UP SAME DAY Y18 N2
04/22/94 3937 (S) PASSED ON RECONSIDERATION
Y16 N4
04/22/94 3938 (S) EFFECTIVE DATE SAME AS PASSAGE
04/22/94 3941 (S) TRANSMITTED TO (H)
04/27/94 3746 (H) READ THE FIRST TIME/REFERRAL(S)
04/27/94 3747 (H) STA, O&G, JUDICIARY, FINANCE
05/07/94 (H) STA AT 08:00 PM CAPITOL 102
05/07/94 (H) MINUTE(STA)
05/08/94 (H) MINUTE(STA)
05/13/94 (H) STA AT 09:00 AM CAPITOL 519
05/14/94 (H) STA AT 09:00 AM CAPITOL 519
05/15/94 4412 (H) STA RPT HCS(STA) 1DP 4NR 2AM
05/15/94 4413 (H) DP: VEZEY
05/15/94 4413 (H) NR:SANDERS,OLBERG,G.DAVIS,ULMER
05/15/94 4413 (H) AM: B.DAVIS, KOTT
05/15/94 4413 (H) -PREV SENATE ZERO FN (REV)
4/21/94
05/15/94 4413 (H) REFERRED TO O&G
05/15/94 4413 (H) O&G REFERRAL WAIVED
05/15/94 4414 (H) JUD REFERRAL WAIVED
05/15/94 4414 (H) FIN REFERRAL WAIVED
05/15/94 4414 (H) RULES TO CALENDAR 5/15/94
05/15/94 4415 (H) READ THE SECOND TIME
05/15/94 4415 (H) STA HCS ADOPTED UNAN CONSENT
05/15/94 4415 (H) AMENDMENT NO 1 BY VEZEY
05/15/94 4415 (H) AMENDMENT NO 1 ADOPTED UNAN
CONSENT
05/15/94 4416 (H) AMENDMENT NO 1-A BY VEZEY
05/15/94 4416 (H) AMENDMENT NO 1A ADOPTED UNAN
CONSENT
05/15/94 4416 (H) AMENDMENT NO 2 BY B.DAVIS
05/15/94 4416 (H) AMENDMENT TO AMENDMENT NO 2 BY
VEZEY
05/15/94 4417 (H) AM TO AM NO 2 ADOPTED UNAN
CONSENT
05/15/94 4417 (H) AM NO 2 AS AMENDED ADOPTED Y24
N14 E2
05/15/94 4418 (H) AMENDMENT NOS 3-5 NOT OFFERED
05/15/94 4418 (H) ADVANCED TO THIRD READING UNAN
CONSENT
05/15/94 4418 (H) READ THE 3RD TIME HCS
CSSB 377(STA) AM H
05/15/94 4418 (H) FAILED PASSAGE Y15 N23 E2
05/15/94 4419 (H) ULMER NOTICE OF RECONSIDERATION
05/16/94 4437 (H) RECON TAKEN UP/IN THIRD READING
05/16/94 4438 (H) RECONSIDERATION FAILED Y18 N21
E1
05/16/94 4438 (H) MOTION TO RESCIND PREV ACTION
IN FLNG TO
05/16/94 4438 (H) ...ADOPT HCS CSSB 377(STA)
AM H(FLD H)
05/16/94 4439 (H) RESCIND PREVIOUS ACTION FLD
Y15 N24 E1
05/19/94 (H) RETURNED TO SENATE
05/19/94 (S) PERMANENTLY FILED IN THE (S)
ACTION NARRATIVE
TAPE 94-60, SIDE A
Number 000
SB 377 - STATE AGENCY FISCAL PROCEDURES
CHAIRMAN AL VEZEY called the meeting to order at 9:00 a.m.
and stated the committee would be taking up SB 377. He
said, "I realize that everything came together here on very
short notice, and we're trying to make some order out of the
confusion, but the intent here is that we would take
testimony today - perhaps tomorrow - we don't know how long
from agency personnel, and some industry personnel. The
intent right now is that we will take testimony from four
people from state agencies and four people from the
industry. Now this schedule is flexible, but it is the
opinion of the Chairman that that is a reasonable amount of
technical and competent testimony on this subject. There
have been previous hearings and there certainly have been
lots of public input in the form of POMs (public opinion
messages) and letters, et cetera and telephone calls
(indiscernible) of the meeting is primarily to get down to
the subject matter, technical aspects of it, the legal
aspects of it, and just the general public policy. I see we
have Mr. Bruce Botelho with us, and I'm expecting Mr. Darrel
Rexwinkel. Mr. Botelho, I don't want to tell the state
really who their four witnesses would be. I think that you
would probably - would you like to join us at the table here
- I think that you would probably agree that four is a
reasonable number to cover the subject and to avoid - and we
don't need to get into repetitive testimony, but I certainly
want to be flexible as to who those four are and certainly,
I anticipate that you would be one of them."
BRUCE BOTELHO, ATTORNEY GENERAL, ALASKA DEPARTMENT OF LAW:
"Thank you, Mr. Chairman and if with the Chairman's
indulgence, I know that Commissioner Rexwinkel was called at
the last minute to speak with the Governor. I expect that
accounts for his delay right now. We are certainly prepared
to speak, and I believe that your allowing us as many as
four persons to testify will adequately serve the state's
interest here."
Number 055
REPRESENTATIVE GAIL PHILLIPS: "Mr. Chairman, before we
start, are we on listen-only teleconference across the
state?"
CHAIRMAN VEZEY: "We're not on any teleconference, that I'm
aware of."
REPRESENTATIVE CLIFF DAVIDSON: "Also, I'd like to question,
if I may, after the legal and technical input or testimony,
will the general public have any opportunity at all during
these proceedings, today or tomorrow, to..."
CHAIRMAN VEZEY: "It's not my intent to take general public
testimony, at this time. We will be flexible on that - we
can change it, but the intent really is to talk to the
agencies and to the industry and to answer problems that are
more a problematic, technical, legal nature."
REPRESENTATIVE DAVIDSON: "So, what would change that you
would envision public testimony coming?"
CHAIRMAN VEZEY: "If there was great desire on the part of
the legislature, on the part of the committee, to extend
these hearings, we can extend them as long as the
legislature would like. And with that, Mr. Botelho, would
you care to - and I understand that you have testified
before the State Affairs Committee before. We have
additional people sitting at the table and I'd just like to
try to assume that we're starting from ground zero again and
not assume that people have heard testimony previously."
MR. BOTELHO: "Thank you Mr. Chairman, and Chairman Porter,
and Chairman Green. It is again a pleasure to have this
opportunity to testify once again on Senate Bill 377 and I
want to express, particularly, my appreciation for your
willingness to devote such time to an issue of great
statewide importance and import. I'd like, with your
permission Chairman Vezey, to ask Spencer Hosie, our chief
attorney, dealing with statutes of limitations, to join me
at the table."
CHAIRMAN VEZEY: "Certainly. Please state his name and
affiliation for the record."
SPENCER HOSIE: "Good morning, Mr. Chairman. My name is
Spencer Hosie and I'm counsel for the Department of Law."
Number 096
MR. BOTELHO: "Mr. Chairman, let me begin by noting that the
May 10 draft that you have before you, is one that is
dramatically different than the bill, Senate Bill 185, that
was originally introduced by Senator Robin Taylor in April
of last year."
Number 103
CHAIRMAN VEZEY: "If I may interrupt, the document that the
attorney general is referring to, is a cover letter of a
sectional analysis, the memorandum is dated May 10 - three
pages of sectional analysis followed by a (indiscernible)
House Committee Substitute for SB 377, Version X, dated May
10, 1994."
Number 111
MR. BOTELHO: "Thank you Mr. Chairman, for that
clarification for the record. Let me speak briefly to this
draft and the origins of this draft, because I think it's
important to recognize that it is a substantially different
document than had been debated initially in the Senate and
(indiscernible) transmitted to this body a month ago. The
version which was transmitted, Committee Substitute for SB
377 amended on the floor, is one that retains extensive
legislative findings and validated, in essence, the
interpretation of the Departments of Revenue and Law with
respect to both the three-year statute of limitations on
assessments and the six-year statute of limitations on
collections. But it had one feature which made it
different, and again I'm talking only about the oil and gas
portions of the bill, I'm not addressing the prorata
provisions of SB 377. It had one other feature that was
different than Senate Bill 185 and that provision was -
again, in recognition of the concern (indiscernible) from
industry about the lack of finality in the assessment
process - that beginning with this tax year, 1994, taxpayers
could rely on the fact that if the Department of Revenue had
not completed its assessment process within those five
years; that is, done an initial assessment, filed any number
of amended assessments within five years, after that five
year period, the Department of Revenue was, at that point,
barred from issuing any amended assessments whose affect was
to raise the amount at issue. That was the bill that was
presented to this body. Mr. Chairman, you have conducted, I
believe, two hearings as the Chair of the House State
Affairs Committee, on this bill and there have been
extensive discussions coordinated by the Speaker of this
body, with representatives of industry and the
administration, and as a consequence, the bill, Draft X,
before you today, reflects those discussions. In addition
to the statute of limitations issues, you'll find divisions
dealing with gas liquids, a methodology for determining oil
valuation prospectively, you will find further references to
royalty settlements as a basis for tax payments in the Cook
Inlet, dealing with urea and ammonia. Those are the primary
differences that are reflected in this bill. I now turn to
Mr. Hosie to give a more extensive background on the bill
and what it will do for the state and for the industry. Mr.
Hosie."
Number 174
MR. HOSIE: "Thank you. As the attorney general mentioned, I
serve as counsel for the state in connection with the
statute of limitations case, now pending in the Alaska
Supreme Court. Before I turn to the specifics of this piece
of legislation, Senate Bill 377, I'd like to take a minute
or two to describe the issue pending in that Supreme Court
appeal and the process and (indiscernible) that gave rise to
this piece of legislation. Now the issue before the Supreme
Court actually can be put in fairly straightforward fashion.
Can a tax assessment that has been issued before the three-
year statute of limitations has expired, be amended after
that three-year statute of limitations has expired? The
state says yes, the taxpayers say no. You can amend after
the three year period only if the amendment reduces the
amount of tax claimed; that is, changes are proper, but only
if they cut in the taxpayer's favor. That is the issue
before the Supreme Court.
"Now how does this amendment problem arise? Well, the
process of assessing and collecting taxes begins with the
tax assessment, itself. And a tax assessment is a formal
legal document very similar to a complaint that initiates a
civil lawsuit. A lawsuit for breach of contract, or an
automobile accident, or fraud. It is a formal document and
it starts a dispute resolution process. It's an
adjudicatory process that will resolve the differences
between the Department of Revenue on the one hand, and the
taxpayers on the other hand. That equivalency, the parallel
between a tax assessment on the one hand, and a civil
complaint on the other hand, was one of the principal
reasons the Supreme Court ruled as it did in the recent
Budget Reserve Fund. Now, after the tax assessment is
issued, the parties continue with the process of discovery.
And the auditors for the Division of Revenue get the
company's documents, and they read them, and they talk to
witnesses, and they think about what they've learned, and
through that process they often develop additional facts and
a more complete understanding of the tax issues and the tax
sums owed. And occasionally, those additional facts and
that greater understanding prompts the division to amend the
assessment and herein, the problem. The industry says that
those amendments are not proper after the three year period
has run, even though the assessment was issued for, if they
serve to increase the tax. Now, if these were just every
day garden variety civil suits, there would not be an issue
and it would be absolutely clear that amendments are proper.
In this state, as in every other state, as in the federal
system, it's proper to amend a complaint after the statute
of limitations has run, so long as the amendment relates
back to the same general issues already in dispute. It's a
doctrine called the `relation back doctrine,' that is, the
amendments relate back to the initial filing. And the logic
of the rule is this: If the parties are already fighting
about something, if the matters are already in dispute, you
shouldn't be surprised by amendments, after all you should
expect them - you're already in a fight. Let me give an
example from our everyday experience that some of us may
have experienced, to our chagrin. Assume you were in an
automobile accident, and you took your car in to get
repairs, and you picked it up at the shop and you drove it
for awhile and you realized that the work had been done
badly; that the car really wasn't fixed and you concluded
that the garage owed you some money. And you went down and
talked to them, and they really weren't much interested in
hearing you out or giving you back your money. So
eventually, angry and frustrated, you join the litigation
explosion and you file a lawsuit. And after you filed the
lawsuit, using a complaint, you got the garage's documents.
And lo and behold, you discover that the parts they put in
the car - parts that you were told were new - were in fact
used. You're outraged by this, and so you amend your
complaint to seek additional damages. You amend your
complaint to conform to the new facts discovered. In
Alaska, as in every other jurisdiction, that amendment is
proper even if it comes after the statute of limitations.
Why? Because it relates back. After all, you're already in
a dispute with the garage about the integrity of the repair
work and who owes whom how much money. No surprise in an
amendment in an ongoing fight. And that's the issue in the
Supreme Court; should the state in the tax context be denied
the benefits of this relation back doctrine, which apply in
every other garden variety suit in Alaska and elsewhere.
"It's probably a good time now to turn to the specifics of
Senate Bill 377 and explain how the various provisions of
this piece of legislation address the problem that I
outlined very briefly. And please let me invite questions
at any point. Section 1..."
Number 265
CHAIRMAN VEZEY: "Mr. Hosie, since you had asked for
questions, most importantly, could you spell your name for
us?"
MR. HOSIE apologized for not doing so before, and spelled
his name for the record.
Number 275
CHAIRMAN VEZEY: "You have made several examples of statute
of limitations, but under current Alaska statutes, what is
the statute of limitations on fraud?"
MR. HOSIE: "The statute of limitations on fraud would be
three years from the date of discovery. And so, if you
uncovered a fraud you would have three years from the date
of your discovery to file a lawsuit. And if you didn't,
you'd lose your right to sue."
CHAIRMAN VEZEY: "So, how does this interrelate to the three
years under Alaska Statute 43.05.230?"
Number 287
MR. HOSIE: "Well, there are, I guess, two parallels.
First, the principal statute of limitations in the tax area
simply gives you three years to get your assessment out.
There is no statute of limitations in the case of fraud or
an intent to evade tax. And so, if a taxpayer's discovered
to have committed fraud, or has exhibited an intent to evade
tax, the statute of limitations doesn't apply. And so
that's the parallel between the fraud statute of limitations
and its application in the taxing context."
CHAIRMAN VEZEY: "So if a taxpayer commits, then the three
years that we're talking about is inapplicable - there's no
limitations."
MR. HOSIE: "That's exactly right."
CHAIRMAN VEZEY: "We're not talking fraud, we're talking
audits and differences of opinion."
MR. HOSIE: "We're talking normal audits with the normal
discovery process with the unearthing of additional facts
and new information that do not involve fraud, because if it
does, as you pointed out, Mr. Chairman, the statute does not
apply at all."
CHAIRMAN VEZEY: "Thank you."
Number 292
REPRESENTATIVE DAVIDSON: "Mr. Hosie, so the nature of the
new information, why (indiscernible) of the types of new
information that would affect the amount of taxes owed or
that would change the assessment and why wouldn't that
information not have been available earlier when the state
made the effort to assess the tax obligation?"
MR. HOSIE: "I'd be happy to, Representative Davidson. Let
me cite an example from the now pending Exxon case in the
Supreme Court. One of the issues in the tax case is the
proper amount of a tanker transportation deduction. The
oil, as most of you probably know, is not refined in Alaska
for the most part, but is moved to various downstream
markets and destinations where it's there refined. To
calculate the value of that oil in Alaska for both royalty
and tax purposes, you need to conduct a net back; that is,
subtract the transportation charges from the downstream
market value. One principal point of contention over the
years has been how you do that. One of the issues in that
general area has been whether the companies get a return on
investment for the use of their tankers; that is, should
they be compensated for the investment they've made in their
tankers. And one of the sub-issues there, is how you take
into account federal tax credits that the taxpayers got in
using their vessels. That sounds like a complicated
example, but it's typical of the kind of issues that arise
in these audits. (Indiscernible) complicated issues and
that's one reason these things take as long as they do to
resolve. And so, there's this federal tax credit issue -
how do you handle the company's federal tax credits. It
takes a long time to realize that it's an issue, to realize
that there are federal tax credits out there and that they
apply to these vessels and that they might (indiscernible)
to change the return on investment credit of the company's
(indiscernible). That involves factual issues, how many
federal tax credits can you specifically tie to the vessels,
in which years were they gained, in which years were they
used and legal questions. Are they properly served, are
they properly used, or is it something that the state of
Alaska really can include in its tax calculations. If they
are used, do you use them all at once, or do you spread them
over a number of years, do you spread them over the useful
life of the vessel, et cetera. So that's the kind of thing
that's discovered through this auditing process. It just
takes a long time to (a) understand the facts and (b)
(indiscernible) apply the tax to the theories and the legal
doctrine.." (indiscernible due to background noise on
tape.)
CHAIRMAN VEZEY: "Please proceed, Mr. Hosie. Representative
Porter, did you want to ask a question?"
REPRESENTATIVE PORTER: "Thank you, Mr. Chairman. In your
discussion of the Exxon case, obviously you're appealing a
ruling in the Superior Court, was the ruling in the
Superior Court - did it address the, in your opinion, of the
relation back doctrine, as it would apply to this case."
MR. HOSIE: "It did not, Representative Porter. That was a
very short opinion and it simply held that the statute, AS
.260, the three-year statute of limitations, on its face,
required that the assessments be, both start within three
years and rendered final within three years. That was the
impact and the effect of that decision. Judge Cranston,
the author of the decision, did not specifically address
relation back, nor did he discuss other issues that had been
addressed at the hearing level and were captured in the
hearing officer's decision. Notwithstanding that, the
parties agree that the applicability of the relation back
doctrine is one of the key things the Supreme Court is going
to have to address and, in fact, it was the state's first
point for appeal and its first issue in the state's brief."
REPRESENTATIVE PORTER: "You don't interpret then that the
Superior Court decision rejected this (indiscernible)
situation to apply to the relation back theory."
MR. HOSIE: "I think that the Superior Court didn't consider
it. And I think it should have. And I am quite positive
that the Supreme Court will consider it because, I think,
that is the dispositive issue in this case. And from the
briefs filed both by the state and Exxon, I think that it's
fair to say that the parties agreed that that's the
dispositive in the case. Judge Cranston, the author of the
opinion below, simply looked at the statute and said, `It
means what it says, and it says what it means,' and
therefore there's no amendments. He basically held that the
statute was unambiguous, but the statute doesn't say a thing
about amendments, never even mentions the word, doesn't say
a thing about relation back. It's absolutely silent on that
point. And if you look at the legislative history for the
three year statute, you see it described as a housekeeping
bill. And you see that it was estimated at having zero
fiscal impact, so there's nothing in the legislative record
that would suggest that the legislature consider this
relation back issue in passing this housekeeping bill. The
statute is silent, the legislative history is silent, and
it's that silence that gives rise to an ambiguity."
MR. BOTELHO: "It might be also important, Mr. Chairman, to
point out that if you look at the other statutes of
limitation found in the Code of Civil Procedure of the
state, which you enacted, you will find no mention of
relation back, and yet that doctrine is one that is
universally accepted. Of the statutes that deal
particularly with tax matters found in Title 43, which don't
mention it either, are entirely consistent with the other
statutes of limitation, whether they're for contract or for
tort, again make no reference, and yet it is a universally
accepted doctrine, now reflected in the Rules of Court of
the Supreme Court, Civil Rule (indiscernible)."
CHAIRMAN VEZEY: "Thank you. Representative Green."
Number 387
REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. Your
example, I know we've talked about the fraud already, but
your example of the relation back doctrine in this car
repair case, there was fraud included there. Does relation
back only apply to fraud cases?"
MR. HOSIE: "No, it applies to all civil cases. It's a
general common law doctrine that pre-existed the Rules of
Court in Alaska. It was captured in Rule 15(c) of the Rules
of Court when they were promulgated, but it's a longstanding
uncontroversial doctrine that applies broadly in all civil
cases; be they fraud-based or tort- based or breach of
contract-based. It's not at all a novel notion."
Number 397
REPRESENTATIVE GREEN: "Was that doctrine mentioned at all
in the Superior Court case?"
MR. HOSIE: "It was not, to my recollection, mentioned in
the opinion and it was argued to the Superior Court, but the
Superior Court really didn't reach that issue directly,
including at the threshold point that the statute itself,
260, was unambiguous and barred the relation back doctrine.
And that decision was reached; notwithstanding that the
statute doesn't say anything about relation back or
amendments and notwithstanding that there's nothing in the
history - the legislative history - for that piece of
legislation addressing either of those points. And the
threshold issue before the Supreme Court will be, was Judge
Cranston right when he ruled that this statute is
unambiguous, and I feel quite comfortable that the Supreme
Court will conclude, that given that the statute is silent
on this issue, it is ambiguous. Either way you go, you have
to imply something into the statute, because it doesn't say
it directly and as soon as you're in the business of
implying something into a statute, you must recognize that
it's ambiguous, you're interpreting it."
Number 412
REPRESENTATIVE GREEN: "One follow up to that. You've said
that this is a doctrine of common law and that it's
unambiguous, it's been used - did you say it has been used
or it is implied in several other cases?"
MR. HOSIE: "Yes."
REPRESENTATIVE GREEN: "The reason I'm asking this is that
something that seems to be so important, certainly you call
it the key in this case, is not mentioned in statute, is not
mentioned, and is not apparently, and was disallowed in the
Superior Court. I'm concerned about the implied situation
that doesn't seem to have been worthy of being put in any
statute or any other reference that you've made."
MR. HOSIE: "Representative Green, in part, the answer is,
that because it's such a long established common law notion,
there frequently are no statutes that support this relation
back doctrine. In most states there are no statutes that
say `and amendments were laid back' just because it's a
longstanding common law notion. And I think that the
taxpayers agree that it is a longstanding common law notion,
but they say it doesn't apply in Alaska in the tax context,
because the statute of limitations, Section 260, doesn't
permit amendments and relation back, even though it's silent
on that point. They read the statute as precluding this
common law doctrine. And that was to be fair to the
taxpayers, the way the Superior Court ruled below."
CHAIRMAN VEZEY: "Thank you, Mr. Hosie. See what happens
when you ask for questions. I've interrupted your train of
thought, so before you do get started again, I want to say
we do have a very full crowd here this morning and if some
of the staff people would be so kind as to maybe give up
their seat to some of the public or other agency people,
because I know we have speaker boxes in our offices and we
can listen down there. So, if we would just try to
cooperate and be as courteous as we can to all the people
that we have here today. Please continue, Mr. Hosie."
Number 444
MR. HOSIE: "Thank you, Mr. Chairman. Turning to the
legislation itself, Senate Bill 377, and starting logically
with Section 1. Section 1 clarifies a longstanding division
interpretation of the statute of limitations in Alaska. It
says that amendments are proper, if made after the statute
of limitations has run, so long as the dispute was begun
before the statute of limitations runs. So this clarifies
and declares that the longstanding division interpretation
of 260 is indeed the right interpretation. To take a brief
detour. That division policy was articulated in the early
1980s and was the subject of a 1984 Attorney General's
Opinion and the Opinion addressed the precise question here;
which is, can amendments be made after the statute is run.
And the Opinion concluded that such amendments were proper,
and that was in 1984. And from that point forward, this
issue has been in the administrative process, working its
way through - through the Superior Court level and now to
the Supreme Court level and it's simply taken this long to
get the case to the Supreme Court and the Supreme Court
hears oral argument next Wednesday, May 18. And presumably,
we'll get an opinion sometime within a year, perhaps 14
months after hearing oral argument. And so Section 1 (a)
clarifies that the division's interpretation, a longstanding
interpretation, is the right one and that amendments are
proper so long as the parties were actually in dispute
before the statute ran.
"Section 2 sets forth a change in the law and the change is
prospective - it applies (indiscernible) and it says, as Mr.
Attorney General, Bruce Botelho, mentioned earlier, that
going forward, the Division of Audit and the Department of
Revenue will have five years to make all amendments. This
statute unambiguously puts a five year cap on the amendment
process. So, if the division wants to go through discovery
and uncover new facts, it has to do that within five years
and make all amendments within five years, and if it waits
too long it loses the right to amend. Section 2 addresses
the collection problem. I've been focusing thus far on the
three-year statute of limitations issue which is the issue
before the Supreme Court. The collection problem is a
slightly different, but related problem, and under Alaska
law, the state, via the Department of Revenue has a limited
number of years to collect on a tax judgment, to collect the
taxes due. And the question arises, well how many years
from what? The statute tells you how many years - six - but
there's some ambiguity about from what. The prior law
suggested that the trigger for the six year period to start
to run was the issuing of the assessment. This statute
changes that and sets forth a series of triggers - the
latest of which is likely to be the final step in the
adjudicatory process; that is, once the dispute's over and
you know what the actual final tax bill is, at that point
the state's six years start to run. And so once you know
what you have to collect and once you're no longer fighting
with the taxpayer about what's owed and what's not owed,
you've got six years to go out and get your money."
CHAIRMAN VEZEY: "It would help if we, and you confused me
just a little bit, because you jumped from Section 1 of the
bill before us to Section 2, could we try to just address
just one section at a time and then maybe take questions on
that, before we go on to the next."
Number 494
REPRESENTATIVE PHILLIPS: "Thank you, Mr. Chairman. Mr.
Hosie, does the state have the ability to be flexible during
that six year time or after that six year time in the
collection process?"
MR. HOSIE: "In the sense of stipulating to a longer or
shorter period?"
Number 498
REPRESENTATIVE PHILLIPS: "I'm thinking primarily to a
longer--would that be an option open to the state?"
MR. HOSIE: "I think there would be nothing in the law to
preclude the state from approaching a taxpayer and asking
for an agreement to extend the period. And if such an
agreement were given and it were in writing, it would
probably be valid and extend the six year period. And so
that could be reached through an accord between the
parties."
REPRESENTATIVE PHILLIPS: "Thank you."
CHAIRMAN VEZEY: "Mr. Hosie, you're confusing me now. The
six year period is referring to Alaska Statute 43.05.260."
MR. BOTELHO clarified it was 270.
CHAIRMAN VEZEY: "I'm sorry, 270 to do with collecting
(indiscernible). The five year proposal on the audit limits
goes back to 43.05.230, and 230 contains a paragraph (c)
that specifically states that the parties can agree to agree
to extend the time period. Now are we cross-referencing
those two?"
Number 515
MR. HOSIE: "Mr. Chairman, to some extent I think we are.
Let me see if I can clarify. Section 1, subpart 2, that
sets forth the prospective five year rule, addresses the
current three-year statute of limitations and the amendment
to the relation back problem. This section says, going
forward, you can amend, but only for five years. When the
five year period comes and goes, the division loses its
ability to amend."
MR. BOTELHO: "In essence, Mr. Chairman, if this were
enacted, the legislature is making a specific finding to
abandon the relation back doctrine."
CHAIRMAN VEZEY: "Representative Davidson."
REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. That
was exactly my question. So, when the state then agrees to
give up its right to relation back doctrine, doesn't that
have possibly some very incredible loss to the treasury
consequences?"
Number 529
MR. HOSIE: "In fairness, it could. It could, but there are
several things that mitigate against that and some of them
are in this legislation - we'll get to them in a minute -
but the legislation will establish a different method of
determining taxable value that's designed to be simple, more
efficient and far more clear, and will make it much easier
for the division to conclude the process within five years.
And so the structure will change to make it much more easy
to conclude the process within five years and that helps.
The other thing that's happened, is that the oil world and
the oil business is fundamentally different today than it
was in the early 1980s. In the early 1980s, it was a
chaotic market, it was a private, silent market; whereas
now, oil prices are like normal commodity prices, like gold
prices or (indiscernible) prices; you can open the Wall
Street Journal and you can find out what West Texas
(indiscernible) is selling for today, what it would cost you
to go out and buy that oil today. And so you have these
public electronic sources for oil prices that simply weren't
around in the kind of detail they are now, back in the
1980s. And so the evolution of the market - it makes it
much easier today to value oil than was the case back in the
1980s. And both of those things, I think, will make it
quite possible for the division to conclude the amendment
process within five years. It's my understanding that this
has been discussed extensively with Commissioner Rexwinkel,
and he's confirmed that with his staff and they feel quite
confident and comfortable that they can live with the five
year amendment rule."
REPRESENTATIVE DAVIDSON: "But if it's such a longstanding
common law notion, why would the state -- you said it
applies in all civil actions and now we're going to have a
civil action, by the state, where it no longer applies.
What's the trade-off? I don't understand why all of this
law, all of a sudden, is not to our benefit as a state to
say `Okay, we'll just wait for five years, then or give you
five years.'"
Number 558
MR. HOSIE: "It is a compromise with the industry and gives
the industry certainty. The industry wants an absolute
window of time in which it can be audited and the audits
amended. It says that certainty is important for the
ability to do business and so, Representative Davidson,
you're absolutely right when you say this is a departure
from existing law and a departure from the law in most other
jurisdictions. It is."
REPRESENTATIVE DAVIDSON: "Does it become a precedent then
for the loss of this doctrine to other civil actions?"
Number 564
MR. HOSIE: "No, particularly not where the state is the
plaintiff and that raises a very good point. In Alaska, the
law is very clear that a statute can be read in derogation
of the state's rights. It can be read to limit the
sovereign's right only if it explicitly does that. The
state has inherent powers of sovereign and legislation that
limits that power has to be explicit. You can't read a
limitation into the state's authority from an ambiguous
statute. You can't imply a limitation. That is the law in
Alaska and that is a critical point in the pending Supreme
Court case because Exxon, of course, looks at Section 260,
which is ambiguous, and says `Oh, since it doesn't
explicitly allow relation back, it's not there.' Wrong.
Wrong premise. If it doesn't explicitly disallow relation
back, the state's sovereign powers are preserved."
Number 576
MR. BOTELHO: "It might be worth adding, Mr. Chairman, those
statutes of limitation or statutes of repose have existed
for many, many years - to the last century - is a relatively
recent innovation that statutes of limitation apply to the
sovereigns, at all. For the most part, again, common law,
government was never barred. It's required specific
legislative action in each of the state (indiscernible)
federal government to impose limitations on government in
its ability, particularly in this area, to collect taxes.
And this legislature did so in 1976. Actually that language
or language similar to it, first appeared, based on my
recollection, in the 1930s in the Territorial legislature.
These have been picked up over the years, but the point is,
that historically, the sovereign wasn't limited at all. And
therefore, in the interpretation of statutes of limitation,
even today as they apply to government, courts are directed
or obligated to resolve ambiguities in favor of the state,
not against it, whether it pertains to tax statute of
limitations or other limits of actions, and if one looks at
Title 9, you'll find specific references to actions
involving the state, which in some respect embody that
deference. And, Mr. Chairman, if I might, having launched
onto this treatise, urge the body perhaps to look at other
statutes of limitation found at AS 09 - 10 details with
limitations on actions, and is a follow up to Representative
Green's question, why with an issue as important as relation
back, there's no reference to it. The statutes don't answer
the question why, but certainly make clear that there is no
reference in any of the statutes of limitation found in
Chapter 10 that mention the doctrine of relation back."
Number 604
REPRESENTATIVE JOHN DAVIES: "Mr. Attorney General or Mr.
Hosie, either one, I have a question about the rationale for
the statute of limitations on collections. Usually these
seem to have to do with providing certainty. What is the
uncertainty in a collection case, where presumably the
amount that's owed is understood and adjudicated to its
end?"
MR. HOSIE: "It is an uncertainty question, but the
uncertainty, is not whether this money is owed, but whether
the creditor collects, goes through the steps to collect.
And limitations on the right to collect are quite common and
are seen in the civil area, generally. Often they're as
long as ten years, and so if you reduce a civil case to
judgment, you can have up to ten years to collect the money
that a court has found you are deserving of. But the policy
call underlying the statute is that if you're going to go
after someone to enforce on a judgment, you should do so
within a certain period of time and that hence, the six year
rule for taxes and the longer rules for other kinds of
actions. So it addresses the uncertainty of the collection
process."
Number 620
REPRESENTATIVE DAVIES: "If the state initiates the process
for collections, is there a set of actions that the state
can go through and has completed everything that it can do,
and then does the statute then, toll if they've done all
those steps?"
MR. HOSIE: "I believe that it is tolled, but I'm quite
honestly, not sure. I've not looked at that precise
question. But if the state is going through the process and
if something goes wrong, there would be a good argument for
tolling."
Number 628
MR. BOTELHO: "Mr. Chairman, the situation arises here and
as I have mentioned before, became implicated in the overall
discussion about the statutes of limitation as a result of a
lawsuit brought by Tesoro. Tesoro had had an assessment
issued by the Department of Revenue. There had been a
decision and Tesoro had appealed that assessment and it was
still being litigated at the time the six-year statute on
collections, in their view, ran out. You'll notice the
language today says, it's six years from the date of
assessment. The assessment is not the final determination
of a tax. And the Department of Revenue's view on that was,
you can't start collecting until you finally know what the
tax is. You need to go through - you have to have a final
decision. Otherwise, you're collecting an unknown. Tesoro
disagreed and went to Superior Court and said, `Look time
has run out - it's been more than six years since the
assessment was issued; therefore, we don't have to pay.'
The Superior Court heard that argument and rejected it
saying, `that flies in the face of common sense' and the
implicit concept that the time is tolled, it stops running
until, and it doesn't start running until there's been a
final determination (indiscernible). And that case went to
the Supreme Court. And last year, the state and Tesoro
settled the case, 13 months after oral argument in the
Supreme Court. Actually, we began our settlement
negotiations 13 months after oral argument in the Supreme
Court and we ultimately settled 17 months after oral
argument in the Supreme Court, without a decision by the
Supreme Court. The bill embodies, in essence, the decision
of the Superior Court, but also more importantly and
consistently, our interpretation of how that collection
statute is to work. The time does not start running on the
six years until there's been a final determination of the
tax owed. And I would note, as well, that the largest
taxpayer in the state, BP, has made clear, I think, that it
has been willing to waive, and I think, publicly announced
that in fact, in the newspapers this morning that they were
prepared to waive that statute with respect to taxes in
dispute with BP on essentially, the same principle. Mr.
Chairman, I hope I've answered Representative Green's
question."
CHAIRMAN VEZEY: "Yes, thank you. Representative Porter."
Number 663
REPRESENTATIVE PORTER: "Bruce, we've had briefings along
the last couple of weeks on these issues and some of them
have been with proprietary information and some of them have
not. So, if I get into that area - I will not ask - but let
me know. I guess, preliminarily, the Tesoro case was not
appealed so that is the law of the land?"
Number 668
MR. BOTELHO: "It was appealed to the State Supreme Court,
it was settled while the Supreme Court was deliberating.
That is, they heard oral argument, which is the last step
preceding the issuance of a decision. Finally, obviously
both sides, the state and Tesoro, recognized that as time
was running, something was holding up the process. It might
suggest that there was a division of opinion within the
Supreme Court, not ultimately resolved. Accordingly, it was
in the interest of both parties to settle because of that
uncertainty."
REPRESENTATIVE PORTER: "How long of a period of time was
that?"
MR. BOTELHO: "Thirteen months - we started our
discussions; that is, Tesoro and the state jointly, 13
months after oral argument. We ultimately settled with
Tesoro 17 months after oral argument, without decision."
REPRESENTATIVE PORTER: "The $3 billion of claims that
exist, is it proper to ask publicly how those split out?"
MR. BOTELHO: "Yes, what I cannot identify for the committee
is any taxpayer specific information. Approximately $1
billion, slightly over that, is tied to the three-year
statute of limitations, and approximately $2 billion is tied
directly to the six-year statute of limitations. Actually,
those numbers are probably a couple months old, and those
numbers are increasing daily."
Number 686
REPRESENTATIVE PORTER: "Would it be fair to say then, that
the Exxon case that will be presented Tuesday, I guess,
addresses one-third then, of those total claims?"
MR. BOTELHO: "That's correct, Mr. Chairman."
CHAIRMAN VEZEY: "Thank you. Representative Davidson."
Number 689
REPRESENTATIVE DAVIDSON: "Thank you very much, Mr.
Chairman. Gentlemen, is there any kind, because we're
always talking about the time crunch in these civil matters,
is there any statute that allows for the Supreme Court or
the entire legal process to bring to the floor or place a
higher priority on cases that affect the public treasury,
and if there is not, would it be in our best interest to
consider such a statute?"
MR. HOSIE: "Representative Davidson, there is a procedure to
ask for expedited treatment in a case where....(tape ends
abruptly.)
TAPE 94-60, SIDE B
Number 000
NOTE: Testimony of first person listed on notes for Side B
is incompletely recorded; side begins abruptly in the midst
of testimony.)
MR. HOSIE: " - for expedited treatment, and that may or may
not be granted."
Number 025
MR. BOTELHO: "The difficulty with putting expedited
consideration on this or any other matter, is the fact that
this body, and, for that matter, the United States Supreme
Court, has also imposed standards in terms of time. The
right to, under our Constitution, both state and federal,
the right to a speedy trial, controls to a very large extent
the calendars of our courts. In addition, by court rule,
children's proceedings have precedence over other matters.
When you're dealing with the lives of individuals, our
system has tended to put priority on those matters above
issues of property disputes over money. And I think that's
been an appropriate priority in our system. I will note,
however, that some states have developed separate tax courts
that are devoted exclusively to resolution of tax disputes
such as ours as one way of avoiding that kind of conflict in
deciding what the time priorities should be of the courts."
REPRESENTATIVE DAVIDSON: "Would it be in Alaska's interest
to consider such a provision, a separate tax court, do you
think?"
MR. BOTELHO: "I'm of two minds. I think the system that we
have in place is generally one that works quite well.
Certainly if one were looking at giving that court
additional responsibilities it might make sense. I suspect
that we would not find enough business to keep the justices
or judges busy full time, if the focus were exclusively were
on, really, a small number of taxpayers; though, admittedly,
dealing with incredibly large amounts of money. I guess
that's my view. I could not justify it as a tax court
alone."
Number 056
REPRESENTATIVE NORDLUND: "Just to clarify the five-year
absolute bar - that was something that was added to the bill
after it was originally introduced, is that correct?"
Number 059
MR. BOTELHO: "That is correct."
Number 060
REPRESENTATIVE NORDLUND: "Is it appropriate to say that
this was a concession on the part of the state?"
Number 061
MR. BOTELHO: "Yes it was. A significant one, but also not
an unreasonable one."
Number 065
CHAIRMAN VEZEY: "Thank you Mr. Hosie, and Mr. Botelho.
Before we go on out of Section 1 completely, I guess the one
question that keeps coming to my mind is, that I would
interpret our current statute as being a three-year
limitation on auditing. I would compare that to Internal
Revenue Service (indiscernible.) We say that we're going
to grant a five-year statute of limitation on audits in the
future, and the state is going to abandon its relation back
doctrine that it has - and, you touched on that briefly, but
I don't quite understand how we said in 1976 that we're
going to have a three-year statute of limitations, and now
we say five - I mean, if we're not honoring the three, why
would we honor the five?"
Number 088
MR. HOSIE: "Mr. Chairman, the state has honored the three.
Because the statute of limitations simply requires that the
dispute start before the three years has run. It doesn't
require that the dispute both start and be finished within
the three-year period. And, in effect, Exxon has argued in
the Supreme Court case, that the process must not only start
within three years, but must conclude within three years.
Because the consequence of not getting it done is that you
lose the right to correct the taxes upward, even if the
evidence suggests that that's right, and the number can only
go down. Statutes of limitations govern the initiation of
litigation. They do not govern how long a case should take
once it's begun, or how it should be litigated once begun.
Once the parties are in an active fight, different rules
apply. There are rules in the civil court that provide
timing deadlines for the process. There are regulations in
the tax area that permit a taxpayer who feels that the
process is going too slowly to complain directly to the
commissioner. A taxpayer who feels that the process is
going too slowly can ask for an immediate formal hearing.
They have as much control over the timing as does the
department. And so, the short answer, Mr. Chairman, is that
the state absolutely has lived with the three-year statute
of limitations. And there is no dispute between and amongst
the parties that if the state didn't get the initial
assessments out within three years, it would have lost its
right - putting aside fraud - to assess it all."
REPRESENTATIVE SANDERS: "In changing this limit from three
years to five years, what is to make us believe that next
year we won't change it from five years to seven years? Or
ten years? And, if that's true, why not change it to ten
years today?"
MR. BOTELHO: "The legislature always retains the authority
to change the laws based on its evaluation of the
circumstances. One has to trust that the legislature
exercises restraint in trying to, among other things,
develop a comprehensive tax policy of the state or in any
other area. I can't give you any assurance, that the next
year the legislature might suggest that seven years would be
right, or ten years; nor would I suggest today that there
might not be circumstances which would lead the legislature
to do so. One has to assume that there are checks and
balances, not only between the branches, not only between
the houses of the legislature, but simply reflecting the
collectivity of this group and the various views that tend
to put a restraint on change's process. We have come with
this particular compromise as reflective of looking at a
system that has been operating one way since 1976. We've
heard the concerns of taxpayers. You will again hear from
taxpayers. And I suspect that you will find that those
taxpayers will recognize that whatever the ambiguity about
the current status, that you will be making a finding that
you are abandoning relation back, that it will be a five-
year fixed period. And that beyond that taxpayers have a
certainty that their assessments will not increase beyond
that period. It's, as I say, a significant compromise. I
dare say, however, that it is possible that a future
Commissioner of Revenue might appear before a future
legislature and tell you that five years is not enough.
There's probably doubt that that would be the case, but I
don't foreclose that. I do not have a crystal ball. I
think one has to count on the wisdom on the legislature to
make the ultimate determination. And obviously that wisdom
includes the ability to reject any change from what we have
today."
REPRESENTATIVE DAVIDSON: "So, if it's a fair evaluation of
our current situation, where it appears there are
disincentives for timely payment, what in your professional
judgment pushes the industry response to forward
proceedings? Now, with the passage of this legislation,
there is an absolute, no more assessment or adjustment of
taxing of (indiscernible.)? Where are we?"
MR. BOTELHO: "It strikes me that there are several events
that have influenced the ability of the Department of
Revenue to move quickly in making decisions, issuing audits
and ultimately assessments within the five-year period. Mr.
Hosie has mentioned the first, and perhaps in many respects
the most significant. And that is, just the evolution of
the industry itself, so that you do have widely reported
prices, which give us a good shorthand for the value of the
crude oil that comes out. You have a very sophisticated
revenue staff, one that has grown not only in size but also
in sophistication. If one compares it to the state of
affairs at the time oil first started flowing from Prudhoe
Bay, when you were dealing with one auditor to do all the
taxes dealing with oil and gas, and a separate auditor to
deal with DNR, and seeing a dramatic increase to three
people the following year, compared to what we have today;
we have a knowledge base which the state has invested in,
and a staff that can get the job done. The
third major development has been more specifically
regulatory in nature, and that is the development of
regulations which try to put in proxies for value that would
eliminate the need for detailed auditing.
"Let me give a couple of examples. The first, and it's
partly embodied in this bill, is the concept of adopting a
forward-looking methodology for oil valuations, similar to
that which we currently have in place and have been working
under for four years now, on the royalty side. We have
actually three different methodologies, all of them having
lots in common. One with ARCO, one with Exxon, and one with
BP, and each of the remaining producers on the North Slope
have elected to report on the basis of one of those three
methodologies. We have had no conflicts with the industry
since we adopted that methodology. The Department of
Revenue has been working closely with the industry to
develop exactly the same concept, so that we can shorthand
the kinds of conflicts we've had before.
"Next, I would point out that we have developed a body of
knowledge which we did not have before. We've invested tens
of millions in getting that body of knowledge in our royalty
litigation. The (indiscernible - Amerada-Hess?) case which
first was filed in 1977, and was settled, at least the first
part, dealing with oil valuation in 1992, that was the final
settlement with Exxon, has been one that has provided us
with a way, again, of understanding the industry; a database
which has allowed the Department of Revenue itself to speed
up the auditing process.
"The final regulatory change that I would mention that
allows us to keep up, was the adoption in late 1990 of an
interim tax regulation. That is, the basis for which the
companies now are required to file interim payments. And
those are based on spot. The importance of that is several
fold. First of all, it shows a trend to relying on systemic
measures of value rather than individual auditing to try and
capture the last dollar or the last cent. The second is
that it reflects the fact that since there is widespread
agreement that spot is a good measure that the difference
between what the department would get on a final payment and
an interim payment is largely minimized. Spot's the value,
that's what you're reporting on, you're not going to see
$100,000,000 cases arising in the revenue context in terms
of disputes. For years, I would say, certainly at least
(indiscernible.)"
REPRESENTATIVE ULMER: "Two questions about Section 1. With
regard to the five-year period, it was suggested to me by
industry that perhaps the one in which that language is
constructed it might not preclude a new assessment from
being issued after the five-year period of time. The
language says after that five-year period, the department
may not increase an assessment under this subsection. Yet
the suggestion is here that there may be a loophole in this
language that would allow the Department of Revenue, even
after five years, somehow, to issue a new assessment. Even
though, not an (indiscernible) assessment. Is that your
reading of the language?"
Number 280
MR. BOTELHO: "It is not. It is possible that we might
issue a new assessment which reduces the amount in dispute,
and that happens very regularly now, and we're not
suggesting a departure from it. New information which the
taxpayer brings forward, which has the consequence of us
deciding that there has been substantiation of the
taxpayer's position, would regularly result in a new
assessment, a new amended, or, refer to it as an amended
assessment, it would have the effect of decreasing. And
hence, the language is specifically crafted to recognize the
ability of the department to reduce assessments but not to
increase it. We do not see it as a mechanism, I don't think
there is any suggestion here, nor do I believe it can be
fairly read to suggest, that the department may issue some
new assessments after the five-year period that has the
effect of increasing the amount."
Number 296
REPRESENTATIVE ULMER: "My second question relates to the
contrast between how Alaska does it versus how other states
or the IRS does it, in terms of the three-year assessment.
I'd like you to explain to the committee how different this
process is in Alaska from other taxing jurisdictions,
particularly oil tax states, or from the IRS; is the three-
year statute of limitations with regard to assessments being
interpreted differently by the state of Alaska than it is in
other states or by the IRS?"
Number 306
MR. HOSIE: "The answer is no. That the division's long-
standing interpretation largely accords with the law in
other jurisdictions, both on the state level and the federal
law. (Coughing, indiscernible.) The federal law is very
different than the state law. It doesn't provide, for
example, for an informal conference process. Deadlines are
different. And federal law has a specific sentence in it
that says, once the dispute's started, the statute of
limitations is tolled. There is no parallel explicit
language in Alaska law, and that's one of Exxon's principal
arguments, that the absence of that explicit power to toll
(indiscernible) statute, means that the 1976 legislature
made a policy decision to void the relation back doctrine in
a tax context and make sure that these things had to be
completed in three years. And so the federal law is
fundamentally different, but provides for the result that
the state advocates here. On the state level, various state
courts have wrestled with this problem, from the 1930s to as
recently as last year. And with one exception the courts
have ruled in the states' favor, ruled that relation back is
proper; that once the dispute starts you can amend until the
dispute is over. The one exception is Montana. The Montana
Supreme Court ruled, quite explicitly, that no amendments
were proper after the statute of limitations had run. And
the language in Montana is very much like the statutory
language in Alaska. Why did the Montana court rule that
way? Well, the Montana court has a unique rule of statutory
construction and interpretation. Unlike Alaska, where
ambiguities are always read in favor of the sovereign, in
Montana the opposite rule applies. And if you have an
ambiguous tax statute, you must read it in favor of the
taxpayer and against the sovereign. And that was the
driving point for that decision. They had a statute that
they admitted was `susceptible to two constructions.' They
then applied the rule of construction, saying that ambiguity
must be read in favor of the taxpayer and against the state,
and accordingly concluded that amendments were not proper.
"Alaska has the other rule of construction, which is far and
away the more common rule, and that the state's inherent
sovereign powers are preserved unless the statute very
explicitly gives up those powers and rights. And so, this
will be largely the substance of the Supreme Court fight,
but the law weighs far more heavily on the state side."
Number 349
REPRESENTATIVE PHILLIPS: "Bruce, every year the state
spends millions of dollars in the process of tax litigation.
Would you surmise that the passage of this new methodology
might reduce the amount of money that we are spending in our
litigation battles?"
MR. BOTELHO: "Without doubt."
REPRESENTATIVE PHILLIPS: "Thank you."
Number 356
REPRESENTATIVE JEANNETTE JAMES: "Referring to Section 1, my
question is, in talking about the referencing back
provision, the language says, in what we're setting for, not
the future, but for the back, so, I am assuming that when we
make language for what's behind us that we have some things
specifically we're covering, and the language says the
department may increase or decrease the amount of tax due by
issuing or amending an assessment. Now, that doesn't say,
necessarily, to me, that that only relates to the
referencing back provision, it looks like you can do it for
anything. It looks like that it's even more broad than
that. Are there to be understood that there are some
convictions and some assessments that may not have totally
fell into the requirement of relating back?"
Number 370
MR. HOSIE: "The statute, I believe, is broader, as you
point out, than the relation back doctrine. The relation
back doctrine has some limits. And one of the limits is
that the amendment has to involve the same general issues
already in dispute. And so, if you're suing the garage
about an auto problem, you can't add an amendment that
involves a property dispute you might have about a fence,
with the owner of the garage. They are two different cases.
This statute, this provision, doesn't address that
limitation. Although, it shouldn't be an issue in the tax
area, because, by definition, when the Audit Division
reviews taxes and issues and assessment, it puts at issue
the entire tax year. The entire constellation of issues
involving how much tax is owed. And the amendments
necessarily relate to those underlying tax issues for that
same tax year."
Number 385
REPRESENTATIVE JAMES: "On the follow-up, there are two
specific kinds of taxes that we're talking about. One is
income taxes, and the other is the severance taxes. And the
income tax is an annual filing and the severance tax is a
monthly filing. It appears to me that some of the same
information that you might be questioning or getting into
filing up in an income tax question might be some of the
same information that you would be needing to determine a
taxable amount in the severance taxes. I guess my question
is, if you find something in one of those cases that applies
back to the other one, does the relation back doctrine fit?
And do we need this broad language to cover all cases? Why
are we putting the broad language in when it's for things
that have happened in the past?"
Number 395
MR. BOTELHO: "I think first it's important to point out as
Representative James has identified that this particular
amendment and indeed this statute of limitations applies to
two taxes. One of them being the production tax, that is
the reference on line 12 on page one, to AS 43.55, the other
to AS 43.21. We know that as the separate accounting income
tax. I think it's important to point out that that tax has
not been in effect for 13, actually 14 years - 13 years in
our state, it covered the period 1978-1981 when it was
changed. This statute of limitation does not apply to our
current income tax, corporate income tax, which has a
separate statute of limitations based on the federal model,
that is found in Chapter 43.20. So, there isn't the
implication of playing back and forth that you might be
anticipating if in fact we are talking about a production
tax and our current corporate income tax. (Coughing and
other noise - indiscernible) so we wouldn't have that kind
of interplay. That was clearly the case earlier when you
had both the separate accounting tax and the production tax
running concurrently and basically raising some of the same
issues. I'm not sure if I directly answered the question."
REPRESENTATIVE JAMES: "Just another question, then, I have
here on some of the things we've been discussing. You
mentioned the $3 billion taxes that are outstanding that you
feel are at risk if we don't pass this legislation. Do you
have a ballpark figure of how much of that $3 billion - is
it all taxes? Or is some of it penalties and interest? Or
is there any kind of a relationship (clearing of throat in
background, difficult to hear)?"
Number 425
MR. BOTELHO: "I think it's a very appropriate question.
The $3 billion is largely taxes and interest. The
relationship is, for each dollar of tax, approximately $1.60
in interest. That's the ratio right now. Obviously, as
time progresses, the ratio becomes greater. That is to say,
the interest is accumulating daily, obviously, and that
number for each additional period of time that we're talking
about will tend to diminish the basic tax vis-a-vis the
interest accumulated."
Number 435
CHAIRMAN VEZEY: "And the interest rate is 12 percent?"
MR. BOTELHO: "The interest rate right now is 11 percent
compounded. And we've actually, earlier, until that
legislative change was made, I believe during the 1990
session, the rate was eight percent simple. There was an
earlier period when it was actually six percent simple."
Number 440
CHAIRMAN VEZEY: "And I believe there's a 25 percent
penalty? Where does that (throat clearing in background -
indiscernible.)?"
Number 441
MR. BOTELHO: "There is a 25 -- There are penalties involved
in the number. I think it would probably be inappropriate
to mention those numbers, only to say that they are rather a
small amount, insignificant amount of the total, and also
interest does not accrue on penalties."
Number 445
REPRESENTATIVE DAVIDSON: "Mr. Attorney General, what is
magical about the two dates included in Section 1? What
were the specific reasons or considerations both from the
state's perspective and rationale for choosing these two
dates? If you could, please, give us your opinion, or why
you think that was convenient also for the industry?"
MR. BOTELHO: "Actually, in our proposal to the Senate Labor
& Commerce Committee, we had proposed tax periods ending
before January 1, 1995, in Section 1, a(1), and in Section 1
a(2), for tax periods beginning December 31, 1994, that was
our proposal. During the course of the committee hearing,
however, industry representatives had urged the committee to
move it back starting this year. And, in consultation with
the Commissioner of Revenue, it was his view that that was
an accommodation that could be made given what I described
earlier are the enhanced ability of the department within a
five-year period to make the collections, it is his view,
and I think is clearly one that I share, that the department
has the capacity to make sure that in this tax year, with
the returns being filed, that we can complete the audit
cycle within five years. And hence the willingness to allow
that date to be moved up to this year as opposed to
beginning in tax year 1995."
REPRESENTATIVE DAVIDSON: "So there was no loss or gain for
either party as regards to those specific dates?"
Number 461
MR. BOTELHO: "I believe that there was a gain to industry
in the sense that they know that certainty will come a
little faster. Obviously, if it's a five-year bar on
assessments, that is to say, no increased assessments after
the five-year period, they have that guarantee starting with
this tax year that in five years they will have that
certainty. The benefit is simply that it's been extended to
this tax year as opposed to beginning next year."
Number 483
REPRESENTATIVE HUDSON: "Mr. Attorney General, I'm trying to
understand this relationship between the three-year statute
of limitation and the six-year for collection statute of
limitation, and relate that to the $3 billion that's been
stated at risk. Are any of the assessments that were issued
by the state prior to the third year at risk because of the
sixth year? What I'm trying to figure out is, does the $3
billion include assessments that were made during the three-
year period of time, which both sides seem to agree, at
least that's there, that you have that period of time, is
the $3 billion assessments made after the third year in
these various cases on, that you're claiming, during the
other types of settlement?"
Number 496
MR. HOSIE: "I believe the answer to be that some of the
dollars encompassed in the $3 billion relate to assessments
that the parties would agree were timely; that is, made
within the initial three-year period. A larger portion of
the money relates to amendments, to assessments, that were
made after the period. So I think there is a little of
both."
Number 501
REPRESENTATIVE HUDSON: "So of the $3 billion,
approximately, how much was made before - or, you know,
timely - and how much would you say is at risk because it
was made through the contentious period, after three years?"
Number 504
MR. BOTELHO: "Slicing the pie, Mr. Chairman, first of all,
as we indicated before, you have $1 billion that are
directly related to the three-year statute; that is, amended
assessments made after initial assessments and $2 billion
that are affected by the six-year collections period. I
think you've asked us to slice the pie further and to
identify of the $2 billion how much of that also is
implicated by assessments that were made after the three-
year period - is that the correct question? Let me turn to
Dick Brewer who is at Legal Audit Services, who may have
that answer right now."
Number 513
RICHARD BREWER, Assistant Director, Oil & Gas Audit
Division, Anchorage, testified regarding SB 377. "There is
some overlap, Representative Hudson, but for the most part
the $2 billion, $1 billion stands."
REPRESENTATIVE HUDSON: "Is the six-year collection - we've
got the dispute, three companies say, that's it, no more
assessments; the state says, no, as long as you're
appealing, we can increase the assessments, and we've done
that, apparently. And now I understand, at any rate, that
maybe the six-year bar is what's potentially jeopardizing
those that were made timely within three years. Is that
correct?"
Number 525
MR. BREWER: "Yes. Exactly. They were made timely, they
were made in a timely fashion as far as we're concerned.
However, they are subject to a six-year statute problem,
yes."
REPRESENTATIVE HUDSON: "And there is a value to that, but
we don't know what it is yet?"
MR. BREWER: "That is correct."
REPRESENTATIVE HUDSON: "Thank you. Please continue, Mr.
Hosie."
MR. HOSIE: "Turning back to the specifics of SB 377, and
moving on to Section 3, bottom of page two, this relates to
several topics that the attorney general has touched on a
few moments ago, and it's a section authorizing the
department to promulgate new regulations addressing the
question of how one values oil and downstream destination
markets, and the section specifically authorizes the use of
the methodology that employs spot prices. Those are the
prices, those are current market prices, those are the
prices that you see in the electronic databases, such as
Reuters and Telerate, and they're the prices that the
industry tracks, relies on, uses, in valuing oil for their
own purposes. The purpose of the section is to simplify and
clarify the process with the hope that there will not be a
continuation of these long-standing expensive tax disputes.
The regulations are designed to explicitly set forth how the
oil is to be valued, using terms and mechanisms well known
to the industry, and prices that are easily tracked by all
concerned. This system is designed to roughly parallel, as
the attorney general mentioned, the market basket system
that was arrived at through the negotiated settlements of
the royalty dispute, the (indiscernible - Amerada Hess?)
case, most recently in April of 1992. That royalty market
basket approach which applied effectively from 1992, uses
spot prices in the downstream destination markets, which is
precisely the approach that this section authorizes. And
so, with going forward, there would be roughly parallel
systems between royalty and tax for valuing the same oil at
the same place downstream.
"Now, that raises a question, and perhaps a problem, that
has been articulated with this bill, and that is, if royalty
numbers are sensible going forward, why not for the past?
And let me take a minute and speak to that. There are two
reasons why the royalty numbers for the past are not
appropriate for tax. There is one very specific and one
more general. The specific reason relates to a contract
entered into in 1979 by the Department of Natural Resources.
Under that contract, the state was limited, for royalty
purposes, to the federal ceiling price for ANS crude oil.
It didn't matter if the producers got more than the federal
ceiling price; for royalty purposes, the state was capped at
the ceiling price. With the benefit of full hindsight, that
was not a great deal for the state. The state did not share
in the upside when the producers got something above the
ceiling price, and the state believes that they did. The
state, in the tax side, never made that deal. There's no
such contract in the tax side, and, to the contrary, there
are specific tax statutes and regulations that give the
state the right to participate in the upside. That is, if
the producers in fact realize more than the federal ceiling
price, the state is entitled to its proportionate share of
that above ceiling price realization. And so, in asking, or
in suggesting that royalty values for the past are
appropriate for tax, the industry is in essence saying, you
made that mistake in the royalty context, why not live with
it in the tax context? There's no need to, and it wouldn't
make good policy.
"Second, and more generally, the royalty case turned on a
1959 contract drafted by an oil industry lawyer. The
state's rights came from that contract and that contract
alone. And the contract had two brief very ambiguous
provisions about how royalties were to be calculated and
paid. And, as I say, that was the source of the state's
rights in that litigation. A 1959 ambiguous contract
drafted by an oil industry lawyer. In fact, in 1980, Judge
Allen Compton, now Justice Allen Compton, looked at that
contract and said, having an oil company lawyer draft it was
just like having the fox watch the henhouse. And so that
was a problem in the royalty case. And it had the effect of
depressing the royalty values because it created risk. It
created risk.
"The other thing that depressed the royalty values is, that
was a jury trial case. And as a consequence, things had to
be simplified, all decisions had to be cut in the producer's
favor. You had to sell the result to a jury. And so the
overall effect was a lowering of the royalty values. And so
in saying that royalty values were appropriately taxed,
industry is saying that you have to live with those
(indiscernible - infirmities?) that were unique to the
royalty contracts. And for those reasons, the use of
royalty values for the task really aren't appropriate, in
any sense, for a tax."
Number 589
CHAIRMAN VEZEY: "Would you apply that prospectively?"
MR. HOSIE: "We would not, for this reason. Prospectively,
in the royalty case, the parties negotiated a different
valuation system that used actual spot prices in the actual
downstream market values. That was different than the
system set forth in the 1959 lease contract. And so,
prospectively the royalty system uses something that is very
much like that set forth in this piece of legislation, SB
377. So it is possible to have parallel systems going
forward, but that parallelism for the past comes at very
great cost to the state. Because there were problems within
the royalty case that simply aren't there in the tax side."
CHAIRMAN VEZEY: "But, in the future, it would be possible
to have a royalty assessment value, and a tax assessment
value, that were parallel?"
MR. HOSIE: "Roughly parallel. Yes, Mr. Chairman, that is
exactly right. They should be roughly parallel."
Number 601
CHAIRMAN VEZEY: "You solve one problem you've automatically
solved the other."
MR. HOSIE: "Mr. Chairman, that's largely right. There may
be small differences between the systems, in part because
there isn't just one royalty methodology now, as the
attorney general mentioned, there are three, with some
variance, but their similarities far outweigh their
differences. And so the tax regulations may be slightly
different, but they will share the same conceptual approach
using downstream spot prices. They start at the same place,
and they should arrive at very near the same place."
Number 607
REPRESENTATIVE GREEN: "You refer to spot prices. Is there
another posting of prices with crude oil?"
Number 609:
MR. HOSIE: "There is, generally referred to as posted
prices for Lower `48 domestic crude oil. There were no
posted prices for ANS until Shell posted on the North Slope
in January of 1984. The reason for that is, there's really
no market for ANS oil on the North Slope. That crude oil
goes elsewhere, to be refined and consumed. And so the
Alaska system has always been fairly unique, quite
different, just given that it's a unique situation, to have
such a large field in such a remote location."
Number 615
MR. BOTELHO: "It might be important to mention, for some:
the posted price is simply, and the experience that I know
Representative Green is well familiar with from his
background, but, the posted price was simply a refiner going
into the field, an oil field, and saying, this is the price
I'm willing to pay for this volume of oil on the field. It
literally, historically was the posting of a sign,
announcing what the refiner, separate from the producer, was
willing to pay to get a quantity of oil. And, as Mr. Hosie
has pointed out, that posted price experience largely has
been absent in the North Slope. Different than anywhere
else in the country. Shell did it only briefly, and
obviously also Shell was only posting for a very limited
amount of oil."
Number 628
REPRESENTATIVE GREEN: "Is it historical that the spot value
and the posted price are the same, or is there a variance?"
MR. HOSIE: "They now are pretty much the same. That has
not always been true. That started to become true in 1985,
and it happened sooner on the Gulf Coast than it did on the
West Coast. In the early 1980s, posted prices often were
static for months on end. They didn't change with changes
in market conditions, whereas the spot price was the daily
market price. It goes up and goes down. So if there is a
refinery fire, or a fire in a field in west Texas, you will
see that reflected in the spot price immediately. A spot
price moves just as a gold quote would move. Whereas the
posted prices were long-term administered prices announced
by the would-be buyers, as the prices they were willing to
pay. And those prices, in the early 80s, did not move with
market conditions. They were not, as most people think
about the notion `market prices' at all. The posted prices
are most analogous to the government prices announced by the
Saudi government in the early 80s. The so-called official
sales prices, OSPs, or government sales prices, GSPs, and
those were prices simply announced by the Saudi royal family
as the price for its oil. But those prices were typically
not market prices. Sometimes much higher, sometimes much
lower, for various political reasons. And so, a posted
price is not a market price, was not a market price in the
early 80s, but slowly became a market price as the markets
evolved, until, I would say, 1985, everybody involved in the
industry - tax collectors, states, oil companies and
refiners - accepted spot prices as market prices and as the
way to measure the worth of the crude oil. And in fact when
an oil producer or a refiner goes out into the market today
to buy oil, almost without exception, they pay a spot price.
It's a market price."
Number 652
REPRESENTATIVE GREEN: "So, you're saying that the
reference, the bench mark crudes are not necessarily
utilized anymore, it's just the spot market price for
whatever crude might be available?"
Number 662
MR. HOSIE: "Well, the legislation gives the department the
discretion to select the crude oils to be used as the bench
mark crudes for this process. That they may pick one or two
crudes for the West Coast market and a different crude or
crudes for the Gulf Coast markets, because the two are
different. That would be an exercise of agency discretion.
To look at the various crudes out there and pick the best
bench mark. For instance, in the royalty settlements, if
memory serves, up to five crudes are used and charted in
various degrees to come up with an aggregate number that is
believed to be most represented of ANS market value
downstream."
Number 665
CHAIRMAN VEZEY: "I tell you what, this is going to be quite
a bit of discussion, I foresee. It is 10:30. Why don't we
take a 15 minute at-ease and come back at a quarter to
eleven."
The State Affairs Standing Committee recessed at 10:30 a.m.
with the hearing to be continued to 10:45 a.m. that day.
TAPE 94-61, SIDE A
Number 000
The House State Affairs Standing Committee returned to order
at 10:49 a.m.
CHAIRMAN VEZEY: "I call the meeting back to order. It's
nine minutes until 11:00 on May 13. I would remind
everybody that this is Friday, May the 13th. The next
person on our list was Representative Phillips and she
hasn't returned yet, so, Representative Porter, you had a
question?"
REPRESENTATIVE PORTER: "Yes, thank you, Mr. Chairman. On
Section 3, a couple of questions. But let me first see if I
have an overall understanding. The totality of the section
basically says that we will establish a value for oil
through this methodology every year, and that that will
remain constant for a year; it will be revalued shortly
before October 30, and that will be then established as the
value for, prospectively, for a year. That will be done by
a standard regulation development process?"
Number 035
MR. BOTELHO: "That is correct, Mr. Chairman."
Number 038
REPRESENTATIVE PORTER: "How long a period of time do you
think that that process - would you envision that that
process would be?"
Number 039
MR. BOTELHO: "First of all, Mr. Chairman, I think it's
important to note that it may well be that the department
will not -- again, the language, specifically, found on page
two, at the beginning at line 29, is that `before each
October 30 the department shall annually review and
determine if any of the adjustments are necessary;' it does
not require that annually the department change the
regulation. This is probably a good entree really to
discuss in somewhat more detail the royalty methodologies.
This is an attempt, basically, to parallel what we have
called the openers to allow for adjustments on the royalty
side. Mr. Chairman, with your indulgence, I'd ask Mr. Hosie
to spend just maybe two or three minutes explaining in more
detail, how the royalty side works, and how this parallels
that provision currently."
Number 060
MR. HOSIE: "Mr. Chairman, the royalty market basket
approach uses various bench mark crudes. There is a
selection of crudes for the West Coast, and a slightly
different selection for the Gulf Coast. To illustrate the
West Coast basket involves a crude called (indiscernible),
West Texas Sour, a crude called (indiscernible) in line 63,
which is indigenous California crude, and (indiscernible)
crude, which is produced offshore in California. Those are
the crudes that make up the market basket. The spot prices
are assessed for those crudes and that market basket spot
price is then used as the downstream destination value.
There are slight differences or there can be slight
differences in the precise makeup and weighting of the
various crudes in the market basket in each of the three
royalty settlements. Each of the big three producers has a
slightly different settlement, given that they were
negotiated deals. Then, that downstream spot-driven market
basket number is netted back to Pump Station #1, the place
at which both the tax and the royalty obligation adhere. As
a consequence, one needs to deduct tanker transportation
charges from the downstream value. Those tanker
transportation charges are also calculated somewhat
differently under the three royalty settlement
methodologies. And so, this tax system would be similar in
its use of a downstream market basket approach. It would be
similar in its use of spot prices, as reported in the public
and the electronic trade press, and it would differ, I
believe, in attempting to achieve some sort of uniform
transportation deduction. But there would be small
differences between the royalty baskets and the tax baskets.
But those differences are the subject now of regulations
being promulgated and discussed with the industry
generally."
Number 104
MR. BOTELHO: "Spencer, if you could comment about re-
openers in the - specifically, re-openers - what do we mean
by the term? How does it work?"
Number 105
MR. HOSIE: "Certainly. Given that oil markets change, and
the world changes, it was viewed as important in the royalty
case not to lock the state into an inflexible, never-
changing system. Some flexibility is important, because you
want to track what actually happens in the marketplace. And
you might have picked a crude which came out of step with
market prices, for whatever reason. Perhaps if it was a
foreign crude the government which controls the pricing for
the crude could announce an artificial price, or someone
might keep the crude off the market, if it were a foreign
crude. And so, there needed to be flexibility to adapt to
changes in the marketplace. And for that reason, the
royalty settlements explicitly gave the parties the right to
reopen in certain events and, in effect, renegotiate the
deals to make sure that the market basket did what it was
designed to do, which was, arrive at a reasonable proxy for
ANS spot prices. That's the market price for ANS oil, which
I think everybody agrees should be the basis for both tax
and royalty now."
Number 127
MR. BOTELHO: "In particular, Mr. Chairman, each of the
settlement agreements provides for a periodic re-opener. My
recollection is, all of them have a three-year periodic re-
opener regardless. And the first re-opener period occurred
with ARCO some months ago. Actually, the overall, re-opener
provision, (indiscernible) provide for a very limited period
to try and reach resolution informally; that doesn't work,
we'd ultimately go to baseball arbitration, that is, both
parties make their best offer and a panel, chosen from a
particular list of specialists in arbitration would be
required to elect which of the two positions is more
correct. We did have the re-opener with ARCO and in a
matter, I think, of less than two weeks we were able to
reach agreement on a slight change to the formula to reflect
activities on Pipeline 63 crudes, as I recall. There is
another provision which provides for what we call government
action re-openers. And this contemplated event could have
happened in the past, and may be anticipated in the future.
Examples would be the dramatic impact that perhaps price
control reimposition might have on the market, or the
requirement that there be double-hull tankers, was another
one discussed extensively. Again, we can't, in the
interests of uniformity in our tax system, negotiate such
agreements with individual taxpayers. What we have done
instead is make clear that there be this annual review to
make sure that the market basket is working as it should,
and basically have a parallel for re-openers by requiring
the department not only review, but make adjustments, as
required."
Number 171
REPRESENTATIVE PORTER: "Mr. Chairman, if I may follow up,
then. In (c) of the section, it says the department may
average or assign different weights to the oil selected
under (b) and the department may adjust the amounts
calculated under (b), to account for differences of oil
types and different destination areas. It seems like those
two things are fair and equitable things to do. When you
say `may' you imply may, or may not. Why shouldn't that be
`shall'?"
Number 181
MR. HOSIE: "Mr. Chairman, for instance, if ANS is one of
the crudes selected in the market basket, there would be no
need for quality adjustment. Similarly, some of the crudes
picked may be very close, and so there may be no need for
quality adjustment. For other crudes picked, say, a
foreign, very light, very sweet crude, there would have to
be a quality adjustment. And I think that the parties all
understand that the object is to arrive at a market basket
that very closely approximates ANS crude oil in terms of all
its physical characteristics. The object is not to pick a
crude oil, or mixed crude oils, that are dissimilar to ANS
oil."
Number 193
REPRESENTATIVE PORTER: "Well, if I may, under (b), you have
that option, to select within the state, or outside of the
state, or a combination thereof. So, if you have only
selected ANS oil, then the first line would seem to be moot.
Because you don't have different oils to weight."
MR. HOSIE: "That's exactly right."
REPRESENTATIVE PORTER: "But if you do, then why shouldn't
those be the ways that you equalize those selections?"
Number 202
MR. BOTELHO: "Mr. Chairman, first of all, when we talk
about weighting the oils, what we're talking about is a
conscious parallel, again, to the royalty settlements, where
the basket that Mr. Hosie referred to, that would include
(indiscernible), include the (indiscernible), Pipeline 63,
Abu Dhabi, and such - they're not weighted equally. That is
to say, they are not all each given 20 percent weighting.
We try to reflect and be able to change the actual activity
in the market and be able to drop out a particular crude, if
in fact it's no longer being traded. To require averaging
or assigning different weights, you almost have to say Shell
average, or assign different weights, is somewhat
inconsistent. If you have to average all three, you're in
essence, it could be argued at least, assigning..."
Number 226
REPRESENTATIVE PORTER: "Well, I think that it assigns the
option, to average or to assign weights, so..."
Number 228
MR. BOTELHO: "Yes. If your understanding of the word `may'
and `shall' is the same, which is what, I, maybe we're not
conflicting..."
Number 235
REPRESENTATIVE PORTER: "I read this to say, you may do
these equitable things to your calculations, or you may not.
And I don't know if that's what the legislature wants to
say."
MR. BOTELHO: "As long as it is understood, Mr. Chairman,
that the department is free to select only one crude?"
Number 245
REPRESENTATIVE PORTER: "That's the way I read it."
MR. BOTELHO: "I suspect that that is not a major issue for
us. Similarly, with regard to providing for differences in
oil types and destination areas. The difficulty obviously
is to avoid the ability of a taxpayer to generate an
argument next over whether the state has provided the proper
weight to be given each crude, or whether it has provided
for the proper differential..."
REPRESENTATIVE PORTER: "...that discussion seems implicit
in the whole process. While we're on a roll, just one more
question if I may, Mr. Chairman. The last line: For the
purposes of this section, current value includes spot or
current prices or assessments publicly reported?
Considering the dispute we have over assessments, wouldn't
market transactions be a better...?"
MR. BOTELHO: "Mr. Chairman, the word assessment here is in
an entirely different context. It isn't referring to tax
assessments."
CHAIRMAN VEZEY: "I'm sorry, I didn't hear that statement."
Number 254
MR. HOSIE: "If I might add something, Mr. Chairman, if the
question went to the point, is an assessment something other
and different than a spot price, there is a small
difference. A spot price is usually a transaction driven
price. Somebody goes out and buys oil, and that transaction
results in a price. Frequently, those transactions are
reported in the spot price (indiscernible) those deals are
reported. Other services don't report on a transaction-
specific basis, but simply look at the market overall, and
arrive at an assessment of spot prices given their survey of
transactions. And so, it's just a distinction that tracks
the way the information is reported in the trade press,
largely."
REPRESENTATIVE PORTER: "Is there a better (persons talking
over one another, exchange is indiscernible) word for that
than assessments?"
MR. BOTELHO: "Market assessments."
MR. HOSIE: "Market assessments. And they're largely
synonymous."
Number 269
CHAIRMAN VEZEY: "Though, it (indiscernible) say or market
assessments, I mean, that's what your intent is."
MR. BOTELHO: "Yes, Mr. Chairman."
MR. HOSIE: "Precisely."
REPRESENTATIVE PHILLIPS: "Mr. Chairman."
CHAIRMAN VEZEY: "Are you through, Mr. Porter?"
REPRESENTATIVE PORTER: "Yes, thank you."
CHAIRMAN VEZEY: "Representative Phillips."
Number 271
REPRESENTATIVE PHILLIPS: "Thank you, Mr. Chairman. I would
recommend that the committee make that an amendment, so that
there is no ambiguity whatsoever about the meaning there. I
do have a question for Bruce. And that is, this is such a
common sense approach of changing the methodology that we're
using. It seems to me to be a very good idea. Why did it
take us so long to get to this point?"
MR. BOTELHO: "Mr. Chairman, I think a variety of reasons.
I know, even when I served as Deputy Commissioner of
Revenue, in between 1984 and 1986, we had been working on
regulations not entirely unlike this. I think a variety of
factors: the on-going litigation at that time over royalty
values, and the concern on both sides, the tax side and
royalty side, that anything done by the state to firm up a
particular approach, given the instability of the market,
and the lack of understanding of the market, could result in
the state getting lower than, use the term, correct value,
or good value. And also you had major differences of
opinion within industry itself about how one should value
oil. And so, it wasn't the industry operating as a
monolith. Even today, you have widely varying values as a
consequence of widely varying costs and transportation, as
an example. And even that, today, remains somewhat of a
concern. I think at this point people are comfortable with
the market, they have confidence in the use of spot price,
both within industry and the state, they have experience now
with the royalty settlement that has been used in this
approach for the last four years, and believe it to work.
That level of confidence and comfort, I think, has persuaded
the department and industry to be engaged in a discussion
over the last several months, to try and reach this point.
It's not to say this could not have happened a couple of
years ago. I think before that time it would be highly, it
would have been very difficult to do so."
MR. HOSIE: "To add that slightly, when the Amerada-Hess
case was being litigated, when the royalty case
(indiscernible), it would have been difficult to work with
the industry in approaching the problem collectively, given
that there was the lawsuit about how the thing should work.
And so, until that lawsuit had been resolved, it was hard to
work with the industry on a collaborative basis. And that
lawsuit wasn't resolved until April 1992 as to the oil
valuation issues.
"One other point to make on spot prices. I don't mean to
suggest by the testimony here today that there is something
wrong with spot prices in periods earlier than the 1980s.
There was a spot market through the late 1970s. In fact, in
1979, ARCO and Union, two very significant West Coast
refiners, collectively bought 70 million barrels of foreign
crude oil on the spot market in calendar year 1979. There
has been a spot market since the 70s, with large volumes of
crude oil traded in it. What's happened, over the time, is
that the electronic data services have gotten better at
coalescing the information and tracking the information.
And so now, everybody has the same sheet of music. And that
wasn't true in 1979, 1980, and it became true over the
passage of time. But conceptually, spot prices were no less
market prices in 1979 than they were in 1985, than they are
today. They have always been a market price. Whereas the
posted price or a government selling price may or may not
have been a market price. It just depended where the market
was relative to the posted price or the GSP price. And so
the notion that's common to both the pending tax regulations
and the past royalty settlements, is use market values, use
actual market prices as your basis. It's a common sense
notion. If you were to go out and buy ANS oil today, in
Long Beach Harbor, what would it cost you? And that number
tells you what that stuff is worth."
CHAIRMAN VEZEY: "Thank you. Representative Davies."
REPRESENTATIVE DAVIES: "Thank you, Mr. Chair. To the point
of the question of the weight calculation, subsection (c),
it seems to me that if we were to change the word to `shall'
that we would have to get rid of the word `different',
because we may want to assign two or more the same weight,
to those oils. So I would suggest a language something like
`shall determine a weighted average of the prices for the
oil selected,' or something similar, and get rid of that
word `different'. But the question I wanted to ask earlier
was, in this whole section where we're simplifying the
evaluation, do we also have provisions in here that simplify
the problem of the transportation costs? The net back to
the point where it's metered. Is, generally, the point
where it's metered, is that pump station #1 - is that where
we take...? And do we take care of the federal tax credit
problems? These other transportation issues?"
MR. HOSIE: "Mr. Chairman, no. This legislation does not
speak to the transportation element, that part of the net
back puzzle. It speaks only to the downstream destination
value aspect of the valuation exercise. The department has
promulgated regulations that do address the transportation
elements, and those are now being discussed with various
industry groups, and particular producers and taxpayers.
But this legislation does not speak to the transportation
aspects. In answer to the second question, the general
point evaluation is the least automatic (indiscernible.)
That's the point at where -- and there's been years of
dispute over that as well. But, generally speaking, that's
where the royalty and the tax obligation attach, for general
purposes. But, as I say, that's been disputed before."
CHAIRMAN VEZEY: "Representative Green."
REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. When we
broke, we were talking on the spot vs. posted prices and I
agree that if a person is going to go buy a cupful or a
tankful on the market, it would be a spot price transaction.
But isn't it also a fact that on volumes, that just as you
are doing here, on an annual adjustment, when you're talking
about large volumes, that you want to come to some sort of
an agreement that doesn't fluctuate as a small quantity
might? And isn't it also a fact that spot prices because of
their nature, dealing with small quantities on a quick -
come in, buy, and get out - generally, if not always, are
higher than posted prices?"
MR. HOSIE: "Mr. Chairman, the relationship between the two
varies over time. For example, there have been times when
spot prices are significantly below posted prices. To use a
foreign crude example, spot prices for foreign crudes were
very much higher than foreign posted prices, GSPs in 1979
and 1980 and most of 1981, but then in October of 1981, the
relationship flipped. And suddenly the foreign posted
prices were much higher than spot prices. And that
continued to be the relationship for some years. And so the
relationship does change, both for domestic crude and
foreign crude. Over the period 1980 to about 1984,
generally speaking, spot prices for domestic oils have been
slightly higher than posted prices. The industry, in
looking at that problem in years past, concluded that the
bias - the downward bias on posted prices -reflected the
impact of the federal windfall profits tax. That was a 70
percent tax effective on the value of oil, and as a
consequence, integrated oil companies, that being companies
that both produced and refined the oil, had a very dramatic
incentive to keep their production oil prices a little
lower. Because if they could move a dollar of profit
downstream to the refining operation or the transportation
operation, they didn't pay the 70 percent windfall profits
tax. And so, in looking at that problem in years past, the
industry itself in its documents, which we've now read, and
the experts, concluded that the downward bias on posted
prices relative to spot, was in large part a function of the
windfall profits tax applying to crude oil production
profits, and not refinery profits, and not transportation
profits. The windfall profits tax, in effect, became
ineffective in about 1984, when crude oil prices dropped,
and is no longer a factor, and in part, that's when the two
spot prices and posted prices, came together."
REPRESENTATIVE GREEN: "If I might."
CHAIRMAN VEZEY: "Please, continue."
REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. Then, I am
sorry that I am slow, but if that's the case, and if that's
the fair way to evaluate what the true price of ANS is, on
some sort of a market basket approach from spot crude, then
why would it not be equivalent for the taxes as it is for
royalty. Because if there's a change, that if the spot
price may be actually sometimes higher than the sales over a
long period, such as is coming from the North Slope, that
would behoove the state just as much if it's higher than if
it's the actual price, because they're going to get it
through the royalty. There may not be that same incentive
if we're doing it on a tax basis, and so would you please
explain to me one more time why whatever is established for
royalty, wouldn't also be established for tax?"
Number 435
MR. HOSIE: "Certainly, Mr. Chairman. We're speaking
prospectively, now? Not for past periods? For two reasons.
One, there are three different royalty numbers, given that
there are three slightly different royalty settlements with
the big three producers. And so, you have three different
numbers, and that doesn't work for tax because there is a
requirement of uniformity. You have to come up with one
number. So it's going to be at little different than at
least two of the royalty settlements by definition. Two,
through the process of drafting the regulations and
discussing the regulations with the industry, the agency may
decide to use a slightly different basket. And I think the
issue would be, isn't that within its just discretion? Or
should it be ordered to be in lockstep with the royalty
market basket? So, I think there is a desire to preserve
some flexibility to work with the industry to come up with a
basket that is suitable as viewed by both parties. And in
fact, the regulations as promulgated as they've been
discussed, would involve six crudes, if memory serves, for
their tax basket, on the West Coast, not just five. And
they weight a little differently. It's just a way of
tweaking the problem to get a result that is as close to ANS
spot prices as you can, and work through the process with
the industry so that everybody is comfortable that the thing
is going to work the way it's anticipated to work. But they
will be different than royalty, in part, because the royalty
numbers themselves are different. There are three different
ones."
Number 450
CHAIRMAN VEZEY: "Mr. Hosie, I don't mean to interrupt, but,
I mean, we all agree that, I mean, the spot prices is going
to be the most volatile of the markets that we follow. It
doesn't have to be, but that would generally be - or are we
not thinking along those lines?"
MR. BOTELHO: "Perhaps, Mr. Chairman, you would substitute
the word most `representative', not necessarily the most
`volatile'; it will reflect the value in the market. Again,
a principle which industry and the state both agree should
be the determinative basis, at least for royalty purposes.
So there's nothing radical in the sense of what we're
talking about here, is exactly the basis we have settled on
the royalty side as a measure -- Let me see a little more
about it. We agree on a base dollar number, a base royalty
number with each of the taxpayers, what the market basket is
tracking is not to tell you directly what ANS is to be
reported for royalty purposes. What we're going to measure
with the basket is the degree of change in the market.
Taking that composite basket so that no one basket that goes
askew is going to not be reflective generally of movement of
oil in the marketplace over a period of time. So the
basket's purpose is, for indexing purposes, to track a
separate dollar amount that we have agreed with each
company, each producer, should be the base number. And
that, again, the - I can't remember the specific month that
is our beginning month, but the basket isn't itself what
tells us they will pay. It is the movement of the basket
that serves as the index for the base dollar value. And my
recollection with the ARCO settlement, which was the first
one, was sometime in early 1990, I believe March, 1990, a
fixed dollar per barrel which set the market basket, then
tracks the movement, the fluctuation in the market,
something that both in ARCO's case they and we could simply
look daily to see what the average was, and know that day
what was to be owed; simply taking that number times the
number of barrels produced. And that is essentially how it
works with Exxon and BP settlements and, as I mentioned
before, all the other producers are able to elect one of
those three. And that's precisely how the basket is
intended to work on the tax side. It'll be a slightly
different basket.
"Now, having said that, I think that Rep. Davies may have
raised the issue, or you, Rep. Green, and that is, there are
three components to calculating - getting back to this value
at the well head, which is in tax statute terms, value at
the point of production - if you're net backing. You first
of all have to solve the problem, what was the received at
the destination point. So that's one component, the distant
problem. The intermediate problem is, how much did it cost
to transport that oil from Valdez, in essence? And under
current tax statutes, producers are entitled to deduct
reasonable costs of transportation. And the third element,
netting back, are the pipeline tariffs costs. Now, we have
settled the problem with the pipeline tariff major dispute,
as you may recall, but that resulted in a settlement in
1985. So that component is fixed. There are seven
different pipelines running through, maybe only six now, but
there were seven pipelines running through taps. I mean,
they weren't separate holes, but in fact seven different
tariffs, and today, there are at least six, as I recall.
Each of them report a tariff and each producer elects,
negotiates a contract with the pipeline carrier, based on
that tariff. That problem is taken care of. The second
problem, the far end problem, is what this prevailing value
regulation attempts to do, and that is, identify a price on
that end. What we have not yet completely grappled with,
and the Department of Revenue is currently working on, is
how do we get at the reasonable cost of transportation? The
industry, as a whole, has widely varying approaches to
transportation. And, on a per barrel basis, I think the
dollar amount between the lowest and highest could be as
much as two and a half, three dollars a barrel. What the
department is trying to grapple with is how you deal with,
if you obviously simply average those differences, there's
going to one company that's going to end up having to pay
still a lot more than another, and another that's going to
get a windfall, from the average. And so it has been a
difficult question to wrestle with. It's one that we're
trying to do in order to satisfy this complete
methodological approach to taxation, so that we can avoid
the need to audit company specific in the kind of detail
we've had to do before. But we haven't cracked the nut yet.
We're working on it. And I would say again that the royalty
methodology approaches, does incorporate transportation, but
it also varies from producer to producer. And is another
reason why it would be difficult simply to say, just use the
royalty methodology. There are three different
methodologies. They treat this question differently. And
in the interest of uniformity, the Department of Revenue has
to approach it in a way that would equally, not necessarily
equally impact taxpayers, but treat them equally in the tax
code."
CHAIRMAN VEZEY: "That enough, Representative Green. More?"
REPRESENTATIVE GREEN: "No, I'll...Thank you."
CHAIRMAN VEZEY: "Representative Nordlund."
Number 541
REPRESENTATIVE NORDLUND: "Thank you, Mr. Chairman. Just to
clarify for the record. It's my understanding that the
industry is in support of Section 3 of the bill?"
MR. BOTELHO: "Mr. Chairman, I think that's probably a
question most appropriately directed to industry. My
understanding is this is something that industry would like
to see, and I think, again, certainly this administration
would like to see as a way of working towards much more
harmonious environment between industry and the state."
CHAIRMAN VEZEY: "Representative Davidson."
Number 548
REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. Mr.
Hosie, Attorney General, if in fact we've only cracked the
transportation nut, and we're not really sure what all - I
guess we know what all is in there, but we don't know how to
establish the true value of oil then, because we don't have
a handle on this, as far as Section 3 is concerned. Would
you please, first of all, tell us to what extent past
assessment appeals have dealt with transportation
disagreements between the state and industry; why we should,
at this point, pass this Section 3 if, in fact, that large
transportation nut is only cracked and not fully established
as far as how it affects the value of oil? And secondly, up
to this point, what about the transport of natural gas
liquids? Have we gotten anything for the transport of that
through the pipeline at this point? If it's all part of the
milkshake as we heard before that comes out and goes down
through the transportation process including in the tankers
and goes downstream where it's beyond Alaska's reach to
extract value, then why are we in a hurry to do this if in
fact we're absolutely putting a cap on when we can go back
and extract the value that was due the state treasury?"
Number 572
MR. HOSIE: "Mr. Chairman, to answer the first of those
questions first, looking at the past disputes, the various
assessments and amendments to those assessments, there are
transportation dollars involved. Those transportation
component ranges, I would say, from somewhere between ten to
30 percent. It's not an insignificant portion, it's a
fairly significant portion, but it's less important than the
basic valuation issues. The principal dispute turns
typically on how one calculates a return on investment, on
ROI, for the vessels employed in the trade, in calculating
the cost of the tanker services to move the crude from
Valdez to the Lower `48 destinations. So there are
transportation disputes with significant dollars turning on
the outcome of those decisions. Second, as the attorney
general mentioned, we have yet to crack the nut of how we
come up with a uniform method for assessing these
transportation charges. But, at this point, the division
understands precisely what it is that various producers have
done. They know which vessels are used, what it costs to
operate the vessels, what it costs to bunker the vessels,
where they go, what the trans-shipment charges are, what the
docking charges are; that information is available and the
division, as an institution, understands how the puzzle fits
together now. That understanding did not come easily. And
it did not come quickly, but it's the benefit of many, many
years of work. But it now is something that the division
understands. And as a consequence, can approach the
transportation issue more quickly and more efficiently. We
now know how the clock is put together. And it's simply a
matter of calibrating how quickly the hands move around the
dial. A third point: There is an ongoing dispute about
natural gas liquids, the NGLs, which are part of the frothy
milkshake, as the hydrocarbons come bubbling up the ground
in the North Slope. To the extent that those liquids, those
hydrocarbons are in the oil stream and go through the LACT
meter, and downstream, they're counted in the overall
volume, and taxes and royalties are assessed. The dispute
now is whether those hydrocarbons are properly characterized
as gas or as oil. And that distinction has significant tax
consequences. If it's gas, there's a different tax rate,
there's a different ELF, and there are certain processing
upstream deduction charges that become an issue. And so the
real issue there is, whether these particular hydrocarbons
are properly characterized as being gaseous in nature or
being oil. And that's something that's now being litigated,
and it's something that this bill actually speaks to, in
Sections 6 and 7. Is that responsive, Mr. Chairman?"
Number 607
REPRESENTATIVE DAVIDSON: "I think it is. If I may have a
follow-up there. In an integrated organization, where we go
from exploration all the way down to oil spill containment,
within almost the same corporate structure, in this
transportation mechanism or element or component, how does
one evaluate the cost of an internal construction effort of
a tanker calculated into what the state loses as well as
what monies are borrowed to construct that tanker? Do you
see what I'm trying -- the financial servicing of a vessel,
does that also go in? In other words, is the state losing a
dollar on a dollar on a dollar because of all this
compounded and compacted cost to industry that is easily
transferred internally within an integrated corporation?"
MR. HOSIE: "Mr. Chairman, I think there are two questions
there, the first of which is, how do you go about
determining the actual costs? How do you determine the
actual deduction? After all, it's a vertically integrated
company, Exxon builds and owns and operates its own boats,
and Exxon can control the financing of those vessels and it
obviously controls the operation of those vessels. So how
do you crack that nut, and figure out what an appropriate
deduction charge is? Well, there are two general
approaches. One is to use actual costs, and the other is to
use some sort of industry average. Thus far, the tax law
has said you must use reasonable costs, and then the law
goes on to define reasonable costs for the most part as
being actual costs. So the exercise to date has largely
involved looking at what it actually costs to build a boat.
And looking at what it actually costs to operate the boat.
And then from those actual costs numbers calculating your
deduction.
"The second question turned on how do you handle the
financing charges? The cost of money charges that are
inherent in any kind of capital intense business and
products, such as building and operating a tanker? And some
of the tankers we now see moving in and out of Valdez were
built in the 1980s, and they cost about $80-$100 million
(indiscernible.) To some extent, the money to construct
those vessels was borrowed, there were interest charges, and
those charges are part of the cost base in the vessel, so
they do increase somewhat the deduction allowable. So, for
instance, if Exxon sinks $80 million of its capital in
building a vessel, that's a cost that's incurred. It's a
cost of time, value and money and so it deserves to be
compensated for that cost, so that's the return on
investment component of the marine calculation process. It
is a very complicated process. And again, that's why these
audits have been so complicated and taken so long. And
that's of course we have the amendment problem that we
have."
REPRESENTATIVE DAVIDSON: "So, the state, your shop, is
comfortable with the fact that with Section 3, and then
going back and relating the loss of the opportunity to go
back and assess, we even have the expertise to deal with
this in a way that does not shortchange the public
treasury?"
MR. BOTELHO: "Mr. Chairman, the answer is yes."
REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman."
CHAIRMAN VEZEY: "Thank you. Representative Porter."
REPRESENTATIVE PORTER: "Always looking for simple answers.
Is it a reasonable assumption then that the goal of this
section, setting transportation costs aside, is that all
taxpayers will have the same value?"
MR. BOTELHO: "Same day production, I think that is the most
likely consequence (indiscernible)."
CHAIRMAN VEZEY: "Did that (indiscernible) your question?"
REPRESENTATIVE PORTER: "Sure did."
CHAIRMAN VEZEY: "Representative Davies."
REPRESENTATIVE DAVIES: "Following up on that question, you
said on the same day of production..."
Number 670
MR. BOTELHO: "Yes, and I should also add, it will also be
affected by, there are other modifiers that should reflect
the market in which the oil is placed. Obviously barrels
going to the West Coast, quite apart from transportation,
will have a different value than barrels on the Gulf market,
as an example."
Number 671
REPRESENTATIVE DAVIES: "All right. That was the question I
was going to get to. You may have barrels produced on the
same date that will go to different markets, and hence,
they'll be sold on different dates as well as in different
markets. And so, do we track all of that information? Each
barrel as to which market goes to which date it's actually
sold on?"
MR. BOTELHO: "We do."
REPRESENTATIVE DAVIES: "Which boat it went on, and all
that?"
MR. BOTELHO: "Yes, we do. It's determined barrel by
barrel, day by day, drop by drop."
REPRESENTATIVE DAVIES: "If I might follow up on this, then,
it would seem to me then it does make sense if we know each
barrel by barrel, the actual date on which it's sold, that
it makes sense to value that on the spot market. That is,
the market that most closely reflects the value of that oil
on the date that it was actually sold."
MR. BOTELHO: "Mr. Chairman, that is correct. And in fact
that is the experience or the experience of putting together
the Amerada Hess case where the parties really had to come
up with common nomenclature, common tracking elements, that
is, the tankers, the destination location, being able to
account for litering and other interim transportation costs.
By contract, I think the experience from the royalty
litigation has created a database that has become common
between the industry and the state that allows for the kind
tracking we're talking about, easily. And again, one that
also makes it quite easy to use this methodological approach
to setting a value over which there will be no dispute."
TAPE 94-61, SIDE B
Number 000
REPRESENTATIVE GREEN: "...it will be given for a royalty
position and also there is a change now, you say, that that
wouldn't affect what the value would be prior to any other
ramifications of the company. But this barrel came from
company A and went to a location and a value was assigned to
it. Why wouldn't it be the same for the tax or the
royalty?"
Number 013
MR. HOSIE: "It will be very close. The only difference
will be, if the tax market basket differs either in
composition of crude oils or in weighting from the pre-
existing negotiated royalty market baskets. But across
taxpayers, the same barrel at the same time in the same
place will have the same value, so that similarly situated
taxpayers will be treated similarly."
Number 024
REPRESENTATIVE GREEN: "Okay, so, for a taxpayer, for that
barrel, it would be the same."
MR. BOTELHO: "In the same market?"
REPRESENTATIVE GREEN: "Yes. It's the same barrel that gets
onshore."
MR. BOTELHO: "I'm sorry. Mr. Chairman, just a
clarification. You want to make sure that the same company
delivering one barrel to one destination is going to pay
exactly the same thing in taxes as well."
REPRESENTATIVE GREEN: "Well, at least it would be subject
to the same value on that barrel subject to tax to that
company as was given for the amount for royalty in payment
rather than in kind."
MR. HOSIE: "Mr. Chairman, the short answer is, no, not
precisely. Because the royalty market basket, there is not
one royalty market basket. There are three, and they differ
between and amongst themselves. And the tax basket
ultimately adopted may use different bench mark crude oils,
and may assign different weights to the crude oil, so there
may be a difference, maybe it's cents, maybe it's a nickel,
between the royalty destination value on the same day at the
same time, and the tax destination value for the same barrel
at the same place and the same time. So there may be a small
difference in downstream values that's a product of slightly
different weighting, on the tax side, or using a slightly
different mix of crude oils in the market basket. So that
we can't promise identical values downstream. But they're
going to be very close."
REPRESENTATIVE GREEN: "Then the question still remains. If
we're talking about how long it takes to come up with a
value so we need to extend the statute five years because
it's a complex situation, are we making it more complex by
doing this? Why isn't there a value that can be traced, as
we've said, and that value used. Now, granted, the tax
situation -but it's the same barrel, from the same company,
and how that tracks his transportation costs back to the
pipeline is going to be different - all those aspects are
going to be different. I understand that. I just don't
understand why there would be a difference on day one for
barrel one from company A that it would be different for tax
or for royalty."
MR. BOTELHO: "Again, Mr. Chairman, let me try a cut on it.
If we're talking about oil delivered to Long Beach -- Right
now, if Exxon, ARCO and BP were all placing oil under their
respective royalty methodologies at Long Beach, they'd come
up with different values, because each one of them has a
separate market basket, slightly different. And tax
methodology will have a basket. And that basket may or may
not reflect a royalty basket for any one of them. The
answer will be whether that ARCO, Exxon and BP in the Long
Beach market delivering oil in the same day will have the
same, those same barrels, delivered that day, for all three
taxpayers, to have the same destination. For tax, under a
common methodology, applicable equally to all three. I may
not be getting through."
CHAIRMAN VEZEY: "Did you conclude your question,
Representative Green?"
REPRESENTATIVE GREEN: "Yes."
CHAIRMAN VEZEY: "Representative Davidson."
Number 101
REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. I
still, there's something that I'm not getting here that I
feel is important. It relates to natural gas liquids and
the cap on the time, so I want to ask the question like
this: Are there NGL volumes that have gone through the
pipeline, for which the state has not received
consideration? As far as, being part of the transportation
cost? In other words, were those natural gas liquids
transported as part of the volume and not computed - I mean,
did they get a free ride? Up to this point, do you have any
idea of the amount of that natural gas liquid that has gone
through for which the state has not received consideration?"
MR. HOSIE: "Mr. Chairman, it is my understanding that all
volumes that go through the LACT meter and go through taps
are counted. So taxes and royalties are paid on those
volumes as oil. And so, the state has received the tax
payment and a royalty payment for that volume of NGLs that's
an indistinguishable part of the overall crude stream. So,
there have been no barrels free-riding south without the
state getting its share of royalties and taxes. There is a
dispute, however, as to whether those NGLs, when they're
part of the overall milkshake stream, are viewed as gas or
as oil, and because that initial characterization changes
the tax rate and other things, it really matters which they
are. And so the characterization dispute - is it gas, or is
it oil? is ongoing. But no barrels have had a free ride
thus far. Some may pay an additional tariff in years to
come, but they've paid something thus far."
REPRESENTATIVE DAVIDSON: "Thank you."
CHAIRMAN VEZEY: "Representative John Davies."
Number 144
REPRESENTATIVE DAVIES: "It seems to me that in order to
answer the questions being asked, that we need to know more
explicitly why it is that - to go back to your Long Beach
case - why it is that the royalty value is different for the
three different companies for a barrel produced on the same
day and transported and sold on the same day at Long Beach.
Why are there three different valuations for the oil at Long
Beach on the royalty side?"
MR. HOSIE: "Mr. Chairman, because each was negotiated
separately in the context of litigation with each of the
three (indiscernible) producers. And so, there was a
separate negotiation with Exxon, a separate negotiation for
BP and a separate negotiation for ARCO. And because they
were separate negotiations, and because it was in the
context of litigation, there are differences between the
various approaches. The similarities far outweigh the
differences, but there are differences, and it was purely a
function of the fact that they were negotiated resolutions
of an ongoing piece of litigation."
Number 172
MR. BOTELHO: "Mr. Chairman, to expand, the market baskets
in each case are different. There may be different
weightings. They result in, obviously, in each bilateral
negotiation, you have the input of the company. We're
trying to reach agreement about how much weight should be
given to which crudes, and again, while there are a lot of,
again, overlaps about what should be in the basket, there
are not, they don't entirely overlap, and there certainly
were differences of views with each of the companies about
how much weight should be given each. Consequently, and of
necessity, the outcomes would be different at each place.
Having said that, my guess is, and I think Mr. Hosie is
correct, you will find, while there will be a difference
individually between using the hypothetical Long Beach
situation between the tax value and the royalty value with
any given company, the difference is going to be minuscule."
Number 200
REPRESENTATIVE DAVIES: "Mr. Chair, one last follow-up on
that. Would it be fair to say that the reason why companies
would be willing to negotiate a slightly different number,
could be that the companies are differently situated at Long
Beach, with respect to their transportation issues, their
litering issues, their production issues, their internal
integration issues, all those things would be different for
the different companies."
Number 202
MR. BOTELHO: "Mr. Chairman, that is certainly correct.
Obviously, you also have the differences in timing. Each of
the companies is very sophisticated in its own evaluation of
what is taking place in the marketplace, and they do
business differently, and as a consequence also their
corporate view of what is happening in the market would lead
them to negotiate differently what the basket should look
like, and what the base number should be, how one deals with
transportation, and the like. I think Representative Davies
is correct when he indicates that it really has to do with
each company being uniquely situated?"
CHAIRMAN VEZEY: "Mr. Botelho, if I may, are we treating the
oil company like a utility, in that we're not pricing our
oil at the, say, at the spigot, at Valdez terminal? We're
pricing it at the final destination? We're treating how
they get it from A to B, treating it as utility?"
Number 218
MR. BOTELHO: "Mr. Chairman, that analogy would be partially
correct. Certainly with regard to TAPS pipeline tariffs,
because those are set just like a utility. There is a
Federal Energy Regulatory Commission which determines what
rates may be charged; they must be reasonable rates; they
also provide for a return. And so, the analogy is quite
correct (indiscernible.) There are actually rate hearings.
The tariffs are set each year. They are subject to
challenge by persons using the individual carriers, or who
have a substantial interest in it, and in fact there are
ongoing proceedings even today, regarding certain issues
related to the TAPS pipelines. The remaining features I
think would be a little more difficult to directly
analogize, to rate making proceedings, because, I think it
would be fair to say, that most utility commissions are not
looking to the markets to determine a value, as it were, and
that it really is what the tax scheme requires us to do.
We're trying to find a proxy for value while we're in the
market, and one that would apply across the board. Utility
rates also are generally directed at individual companies
and we are looking at something that would be industry
(indiscernible.) But I think the general concept obviously,
is trying to categorize, trying to eliminate the need for
in-depth, intensive, individual company by company review of
every transaction in favor of something that is a close
proxy to these basic values is certainly (indiscernible.)
Mr. Hosie may want to expand on that - and, Mr. Chairman,
you may not want any expansion on that."
CHAIRMAN VEZEY: "Representative Hudson."
Number 260
REPRESENTATIVE HUDSON: "Thank you, Mr. Chairman. It
strikes me that this whole question of transportation costs,
Bruce, is one of the major things that could fail to reach
concurrence as to the price and the taxes that are owed.
I'm beginning to suspect that that may be the major thing
that elongates this whole process, which makes it difficult
to settle it. And I'm assuming, at any rate, that the
production costs are fairly easy to assess and come to
conclusion; the TAPS costs are fairly easy to understand,
you said that's almost regulated; and so then, it comes down
to the question of, you know, what the costs or values of,
say, tankers and rehabs and crewing and all of those types
of things -- Are there any other aspects on the downside of
this thing? Why wouldn't we, for example, have taxed this
back at Valdez? That is, stop everything at Valdez, and not
take into consideration any transportation costs; just
simply said, we'll assess our taxes at the Valdez point of
loading."
Number 279
MR. BOTELHO: "Mr. Chairman, I think that's a very good
question. You need one element. You need to know market.
You need to know what the value is in the marketplace. And
the marketplace, by and large, is not at Valdez. So you
need, either, by proxy, that is, you come up with some way
to account for transportation on a generalized basis, an
average, weighted average, or whatever, to each market, as
part of this net back, or you can take the historic approach
of the Department of Revenue, and that is to go company by
company, and actually determine what the reasonable cost of
transportation is with respect to that company, taking into
account the return on investments, the capital costs
involved with the shipping itself, the crew charges, the
bunker charges, and the like. The reason we haven't bitten
that off is that, in this process, we're not far enough
along in solving that problem to present it to you as the
legislature to solve yourselves. I think our view is that
is certainly where our focus of attention will go once we
have gotten, having solved the pipeline portion of it, and
now trying to deal with the end destination portion of it,
obviously, our focus of attention will be on what we can do
to either standardize transportation costs or, at the very
least, figure out how we can streamline the taxpayer by
taxpayer approach to transportation. All that is something
we can see happening easily within a five-year period."
Number 309
REPRESENTATIVE HUDSON: "Do you feel you have the resources
-if I might, Mr. Chairman - do you feel you have the
resources to adequately assess the state's position on the
downstream side? Particularly the transportation costs of
the vessels, and all that type of stuff?"
MR. BOTELHO: "Mr. Chairman, we do. And let me make clear,
we do not rely exclusively on in-house expertise for a large
part of the oil and gas litigation budget has been dedicated
to finding some of the leading experts in the country on
this issue to assist us in evaluating. And they have been
key personnel also in trying to devise ways to streamline
the system overall. They've not simply been there to
further aid us in our litigation, but also to try and see
how we can prospectively solve problems."
CHAIRMAN VEZEY: "Please proceed."
MR. HOSIE: "Thank you, Mr. Chairman. Turning to Section 4
on page 3, we find the amendments actually appearing on page
4. These amendments speak to an issue that we haven't
really touched on today yet, which is, what is the correct
processing cost for a barrel of gas liquids? There are gas
processing facilities on the North Slope. They were very
expensive to build. And the costs of those facilities is to
be spread over these barrels of gas liquids produced. And
the question is, how much should the proper deduction for
each barrel be as assessed against the state? That's being
litigated now, on the royalty side. The state takes the
position that the proper deduction is something in the
vicinity of 56 to 60 cents a barrel. The industry argues
for a much higher deduction, ranging from three to perhaps
as high as four dollars and fifty cents a barrel. This
simply works a compromise. At a dollar per barrel plant
liquid produced, as the proper gas processing charge. It is
a compromise. It's a little higher than the state would
like, and significantly lower than the industry would like."
CHAIRMAN VEZEY: "Mr. Hosie, Mr. Botelho, I think it's
probably a good time that we break for lunch at this time
and we'll start up on this subject when we get back. It's
about five minutes until twelve; why don't we all be back
here by 1:30."
The House Standing Committee was at ease until 1:32 p.m. of
that day and returned to order at that time.
CHAIRMAN VEZEY: "Mr. Hosie, you had just got through going
briefly through Section 4. I think you finished your
remarks. Are you ready for questions or would you like to
make some more remarks?"
Number 373
MR. HOSIE: "I had finished with the remarks, Mr. Chairman,
so we're ready for questions on Section 4."
Number 375
CHAIRMAN VEZEY: "Are there questions from the committee on
Section 4? My question is, this seems a little odd,
compared to some of the other things that we're doing, in
calculating values. On the transportation aspect, and the
pipeline, we have a regular tariff. On the shipping, from
the terminal of the pipeline, to the destination point, we
are calculating something similar to a tariff. We're doing
it on a cost basis, and we argue over auditing what costs
are legitimate. Here we're just setting a flat rate per
barrel. Now, if we could do that at the well head, or at
Pump Station 1, we could eliminate an awful lot of auditing
requirements. Why are we taking this approach here all of a
sudden, as opposed to our cost evaluations that we do in
virtually all the other aspects that you've talked to us
about?"
Number 389
MR. BOTELHO: "Mr. Chairman, the provision here is
reflective of specific industry dialogue as a consequence of
this bill going through the public process in the
legislature. And, in particular, in the last three weeks,
industry representatives, recognizing that the governor was
intent on having a bill be acted upon by both the House and
the Senate, seeing the bill as a vehicle to resolve other
outstanding issues that have been in contention, we were not
adverse to considering those kinds of issues because if we
could deal with them now it would avoid us having to
litigate over it or having to invest substantial auditing
time. And as a consequence this particular provision was
one presented to us which we reviewed and we're satisfied
made the right tax choice. I would also want to say, I
think, I need to be guarded in what I say because obviously
this is an issue that arises both in the royalty side and
the tax side, and the royalty one is in litigation, and
obviously remarks made here can be used as evidence in the
other proceeding. Hence, my reticence about being overly
direct with you. But our view is that the language
presented here, and, specifically, the dollar charge, has to
be read in tandem with the provisions dealing with the
condensate distillate and gas processing plant definitions
(indiscernible) sections which have the consequence of
treating for tax purposes these gas liquids as gas rather
than oil. As I say, the issue arises on the royalty side as
well. We're litigating specifically over that issue. It's
quite clear that if you enact this bill, it could have some
bearing on it, but I would like not to make much more in the
way of specific remarks, at least in open session, because
of the potential consequences to our litigation posture on
the royalty side."
CHAIRMAN VEZEY: "I'm not quite sure if that answered my
question, because, I guess more simply put, why do we try to
set a price for work being formed in this instance, when in
every other instance that I'm aware of, we go through and
evaluate costs, and argue over what costs are legitimate?"
Number 432
MR. HOSIE: "Mr. Chairman, I think the answer is that this
gas processing cost relates to a fixed number. It's a fixed
investment. (Indiscernible) cost, what it costs to
construct and that number is now known. The question is,
how should that cost be spread over the barrels of liquid
produced? And so, we have a known number, and so the
question becomes, how much of that cost should be borne by
the state? And so it's not a situation where the numbers
are fluctuating as prices in markets (indiscernible), or as
tanker transportation charges will fluctuate as bunker
prices go up and down. And so this one narrow element seems
suitable for this kind of fixed number approach."
Number 444
CHAIRMAN VEZEY: "Well, that is an answer, but...you implied
that this is a fixed expense, not subject to fluctuation to
the producers, to the operator of the plants. You implied
that, say, tankerage is not a fixed expense. And granted,
it is not set in concrete, but - I'm still not sure that I
understand why it is equitable just to arbitrarily set a
ceiling. Obviously, it can be lower. It cannot exceed one
dollar. So there has to be a basis for determining if it's
going to be lower."
Number 454
MR. BOTELHO: "If you're willing to recess into executive
session, I will be glad to discuss this matter fully. As I
indicated to you, to do so in open session makes the
information available to people we are litigating against
right now on this very issue. And to do so in open session
would have the consequence of immediately adversely
impacting the financial status of the state."
Number 460
CHAIRMAN VEZEY: "I'm not interested in any special
knowledge you have, or any proprietary knowledge you have,
it's just the philosophy of why are we trying in this
particular instance -if we're going to do this here, why
don't we try to negotiate a price for our oil at the spigot
at Valdez, or at Pump Station 1, instead of backing out all
the transportation costs?"
Number 467
MR. HOSIE: "Mr. Chairman, I think there were two reasons.
One, the value at the point of production will depend in
large part on where the barrel of oil goes. The barrel of
oil that goes to the Gulf Coast..."
Number 470
CHAIRMAN VEZEY interjected, "That's a very poor assumption
to make. I mean, a commodity is - you don't control the
price of a commodity, except for transportation cost. To
say that a barrel of oil at Prudhoe Bay is worth less just
because you can get another barrel of oil cheaper somewhere
else, isn't really true. The difference is, the market that
is where it is consumed. You have transportation, handling,
and storage charges between the point of production and the
point where it's consumed. But if we can assign a value to
processing gas liquids out of gas, so that the gas -- the
gas is being used. It's a useful product at Prudhoe Bay.
The gas liquids have to be removed in order to use the gas.
If we can do this here, why can't we just back out
transportation costs and just say that Prudhoe Bay oil has
got a value at the North Slope?"
MR. BOTELHO: "Mr. Chairman, if the assumption is that this
dollar reflects the value of these gas liquids, I think
there's a misunderstanding..."
Number 487
CHAIRMAN VEZEY interjected, "I interpret it as reflecting
the value of the cost of getting it out of the gas stream."
Number 488
MR. BOTELHO: "It is the processing cost, exactly, that is
the ceiling (indiscernible.) There is nothing that you
could preclude or would preclude the legislature from
deciding that it wanted to fix a value at Valdez. You could
decide that it is a fixed cents per barrel coming out of the
pipeline at Valdez. You could do so at the well head, as we
would say. At North Slope as well. That is, those are
permissible decisions which this body could choose to do.
Right now, however, the tax structure you have, is one that
looks at value at the point of production. And in order to
arrive at that, because there are no sales at that point of
production, is to look at the downstream market, or markets,
where those sales take place. That automatically forces you
into this net back scenario. For the most part, there are
few sales, at Valdez, that would be a proxy for this value
at the point of production, where you could run through.
The legislature could depart from that and simply say, any
of a number of schemes, and decide that Valdez should be the
point where you measure the value. You could do so. I
think it would be difficult to do so, unless you were
looking at something like a fixed cent per barrel approach,
because you don't have transactions that are taking place
there that would give you a sense of what the market is
doing. Obviously, another approach would be, simply to do a
proxy on transportation to these various markets. And
that's obviously one of the things that is implicit, both in
the royalty settlements and is something again that the
Department of Revenue is looking at in trying to satisfy
this transportation component of the net back. So, if we've
suggested that you couldn't do something at Valdez, you
could. There's no doubt about it. You have the authority.
It would require I think a significant departure from the
underlying tax structure. There's nothing wrong with that
at all. There are some advantages, frankly, for being able
to have a set number. But to the extent that you're trying
to capture the concept of value, you need to do it in
relation to the market."
CHAIRMAN VEZEY: "The concept that I am having trouble
grasping is that when it comes to backing out transportation
charges or trying to determine the value of the commodity
that we're selling, or taxing, as the case might normally
be, and we're talking taxes here, we are very flexible as to
how we determine what those costs between final marketing
and production are. And we are not consistent from one
taxpayer to the other. According to your testimony, we have
different things that we've agreed upon that make the
(indiscernible) come out to a different answer. But here
we're saying that we're not going to allow anything above a
ceiling of one dollar. It doesn't say you're going to allow
a dollar. You may allow a number that's less based on, I
would assume, a cost evaluation, a cost audit."
MR. BOTELHO: "That is correct."
CHAIRMAN VEZEY: "Why are we putting a ceiling of one dollar
-if their costs are two dollars, why don't we treat it like
transportation instead of treating it like some sort of a
production penalty, or something?"
Number 532
MR. BOTELHO: "Mr. Chairman, I think there are several
answers, and certainly Mr. Hosie may have his own views on
this. First of all, it has to be seen in the totality what
the state has indicated in this package, is it's willingness
to give up its litigation position that these gas liquids
are oil; that, instead, they be treated as gas. The
consequence of it is, first, generally speaking, well,
there's a different and lower tax rate for gas than there is
oil. The next concession is there's also a different
economic limit factor, which is a further benefit. The quid
pro quo in making this determination is to put a ceiling,
based again on our own evaluation of the fixed costs, of a
dollar, so that we do not have to litigate with producers,
processing costs. Just as we have reached agreements,
again, on the processing costs related to oil on Prudhoe
Bay. Not reflected in what we're doing in this bill, but in
fact we have such agreements as to the maximum amount which
a producer may deduct for the cleaning costs, making the oil
marketable at Prudhoe Bay. (Indiscernible) this is a
parallel to that."
Number 552
CHAIRMAN VEZEY: "Your answer is, it's just an arbitrary
compromise."
MR. BOTELHO: "My answer is, it is a compromise. I do not
believe it was arbitrary."
CHAIRMAN VEZEY: "Well, by arbitrary, I mean, that's where
the number fell. It was not..."
Number 555
MR. BOTELHO: "The state would have preferred, Mr. Chairman,
a lower number, I think you will find other members of
industry that would like to see a higher number. My
suspicion is that you would hear testimony by people who
would like to say that there should be no ceiling at all, it
should reflect whatever a producer might suggest it should
be."
CHAIRMAN VEZEY: "I think one more question, if I may. We
write statutes, we like to think that there won't be a
change every three or four years, and maybe they'd stay in
place for 10 or 20 years. Some of our Title 43 statutes
have been in place since 1949."
MR. BOTELHO: "That's correct."
CHAIRMAN VEZEY: "Don't you think we should address this so
that that number will slide as inflation ebbs or wanes?"
Number 565
MR. BOTELHO: "Mr. Chairman, I think that is something that,
again, falls within the realm of reasonableness. I would
note on the other hand, however, we are dealing here with a
fixed cost and known cost. You would index, normally, when
you are expecting fluctuation. But the question here is
being able to - to put that processing cost in part to allow
producers to recover their investment in the facility used
to clean the liquids; that is, to clean the gas, for
marketing. Mr. Hosie, do you have anything to add?"
MR. HOSIE: "Nothing to that."
CHAIRMAN VEZEY: "Thank you. Representative Green."
Number 573
REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. You
indicated earlier that you would be willing to go into
Executive Session because if there were statements made
publicly it might influence litigation. What is your
feeling toward the fact that this piece of legislation is
being rushed through the process -- I dare say it's been
very enlightening to the people that were here, but there
are a lot of the legislature isn't here -- and that, by
doing something as important as this on a fast track, is
there any possibility that the outcome of this legislation
would also have an impact on the court's decision?"
Number 584
MR. BOTELHO: "Mr. Chairman, to the extent that the
committee is uncomfortable or the three committees sitting
here in concert is uncomfortable with these additional
provisions, obviously it's free to delete. We have used the
bill as a vehicle to resolve disputes that we have with the
industry. And to the extent that the committee is
uncomfortable with its level of knowledge about
(indiscernible) reflected in the bill, these issues clearly
are important enough that if the committee believes it most
desirable to hold off, then those provisions should be
deleted. I say this with some reservation, obviously,
because I think the industry has worked with us in good
faith to arrive at some improvements in our overall
relationship. Our goal here isn't simply to have good
relations; obviously, we have a duty first and foremost to
make sure that the taxes are collected as they become due.
And that is our primary purpose here. At the same time, to
the extent that we can accomplish it in a way that minimizes
conflict over issues arising out of our current scheme, we
should do so. That's what is reflected in the bill. And
what is reflected here. Obviously, I think it would be
helpful, and I trust that the committee will be hearing from
certain members of industry, I think it would be important
to hear from all members of industry. Again, the benefits
don't directly impact every company in each of these
provisions, but I think collectively reflect our efforts to
try and solve problems that have come to our attention as a
result of the focus publicly on this bill, and their view
that this bill could be a vehicle to resolve additional
disputes."
CHAIRMAN VEZEY: "Thank you. Further questions? Further
questions on Section 4? Representative Sitton? I'm sorry,
I had Representative Davidson down, I'm sorry
Representative. Representative Davidson."
Number 611
REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. So,
you made the statement that the state's position was that
you would look to see that dollar figure lower. So I'm
assuming, then, that there was loss and not gain as far as
the state was concerned. So, I would like to ask, how is it
that you have quantified what those losses are? And how is
it that the industry has quantified what those gains were?
I'll start with that."
Number 619
MR. BOTELHO: "Mr. Chairman, one can look at the current tax
rate, making the assumption that these liquids are oil, one
knows the volume that has flowed since the injection of
these liquids into the pipeline in the mid-80s, and thus can
know with some degree of certainty what that dollar amount
is. And one can also calculate the, taking the similar
volume, the identical volume, and taking it at the lower gas
rate, and you have that differential, and you can factor
again the dollar ceiling, or using the dollar amount, as the
ceiling for deductions for processing costs, and know the
gap. And then the next issue you look at is your litigation
risk, your position vs. that of the industry. What are the
practices in other states? And what do the experts have to
say about the treatment of those gas liquids? And make a
decision about whether this is a reasonable settlement or
not, and whether and how much the state is giving up to
reach that reasonable settlement. We can also make the
projection forward looking in terms of the anticipated
amounts of gas liquid expected to be produced. Those
projections are modified regularly to reach similar
conclusions."
Number 642
REPRESENTATIVE DAVIDSON: "Mr. Chairman, if I may follow. I
know that the industry can do what they wish with their
natural gas liquids, but does that mean that we've given up
some opportunity for value-added product by allowing a
situation here -- are all of these natural gas liquids then
after processing, how they will be transported, if they are
processed on the North Slope?"
Number 647
MR. HOSIE: "Mr. Chairman, the natural gas liquids will be
transported as an indistinguishable portion of the TAPS
common stream. And it's just a question of figuring out
what portion of that common stream consists of these
recovered natural gas liquids. So they will pay freight as
they go down the TAPS system, but they're just part of the
overall oil stream."
REPRESENTATIVE DAVIDSON: "And the freight that they pay on
that - would that make the tariff that the state pays on its
royalty oil, does it make it a cheaper rate? Or because
there's a greater volume of things that benefit the other
party, and not the state, or how does that work?"
MR. HOSIE: "Mr. Chairman, if your question is, does
including the NGLs into the common stream going through TAPS
have a tariff consequence, I believe the answer is, that
largely it does not. It may have a quality (indiscernible)
consequence for the people who take the crude out of the
pipeline at North Pole refinery near Fairbanks because of
the overall gravity of the stream. But in terms of the base
(indiscernible) tariff, I don't think there is any
significant consequence by including the NGLs in the common
oil stream. It does lighten the stream some, however. The
specific gravity goes up."
REPRESENTATIVE DAVIDSON: "Thank you."
CHAIRMAN VEZEY: "Thank you. Representative Sitton."
REPRESENTATIVE SITTON: "Thank you, Mr. Chairman. I want to
make sure, Mr. Chairman, that with all these questions I
don't get lost. Am I correct in understanding that the
industry supports Section 4, right?"
MR. BOTELHO: "Mr. Chairman, I think it is fair to say that
for the most part the answer would be yes. I think you will
find that there will be companies who will disagree with the
dollar ceiling. I think you will have others who will say
that it is an appropriate trade-off for the state's
willingness to recognize these gas liquids as gas rather
than oil."
CHAIRMAN VEZEY: "Further questions on Section 4?
Representative Bettye Davis."
Number 673
REPRESENTATIVE BETTYE DAVIS: "Thank you, Mr. Chairman. I
would just like to follow through on the question that was
asked by Mr. Sitton. On Section 4, what we were doing with
the gas liquids, our stand that we are taking is that this
has already been done by other states already? Are we the
only one that treat it different?"
MR. BOTELHO: "Mr. Chairman, my recollection is that Alaska
has been unique in its position on this. Is that correct?"
MR. HOSIE: "I think that's fair."
REPRESENTATIVE B. DAVIS: "Thank you."
CHAIRMAN VEZEY: "Further questions on Section 4? Could we
move on to Section 5?"
MR. HOSIE: "Certainly, Mr. Chairman. With that, let's turn
to Section 5, which begins, or at least the amended portion
begins on page 5 of your draft legislation. Subsection (d).
This reflects a particular problem unique to the Cook Inlet
region, where a certain company takes gas and uses it as a
feedstock in the production of urea and ammonia, principally
for fertilizers. Section (d) provides that the gross value
at the point of production for that ammonia and urea
feedstock set equal to an amount negotiated in a pre-
existing royalty settlement agreement, to which the state
and that producer are a party. Essentially, that's what it
does."
REPRESENTATIVE PHILLIPS: "Mr. Chairman."
CHAIRMAN VEZEY: "Representative Phillips."
Number 689
REPRESENTATIVE PHILLIPS: "On page 5, line 29, the first
word on the line, `Paragraph'. It seems to me this would be
better if that word were `Section.'"
Number 692
MR. BOTELHO: "That's correct."
TAPE 94-62, SIDE A
Number 000
CHAIRMAN VEZEY: "You mentioned in your testimony that we do
have a viable market for Arctic Slope crude and we really
don't need, I took your testimony to say we don't need to
look at the world market crude (indiscernible) for the
Arctic Slope crude."
Number 029
UNIDENTIFIED SPEAKER: "Basically that's correct. You don't
have to look elsewhere. There was enough cash sales in the
market place back in the early periods and there is enough
knowledge of the spot market today to look at ANS. We'll
agree with the attorney general and with Mr. Hosie on one
point, and this was the question about whether you could
value it at the well head, and really, the value has to be
worked back from the marketplace. It has to be worked back
from the Gulf Coast, East Coast, West Coast, or wherever the
crude goes because that affects the value. You can only
place so many barrels of ANS on the West Coast before the
market is full. And the next viable market for ANS is
probably the Gulf Coast, and the net back value from the
Gulf Coast is going to be lower than the West Coast. Now,
I'll draw an analogy. Mr. Hosie has talked about the spot
market and tried to value, in the late 70s and early 80s, a
hundred percent of the ANS crude had a very thin spot
market. The point is, the more crude that could have come
onto that spot market would have driven the spot market
price down because it was a thin market. So you can't take
and look and find that there was 20 million barrels that
sold at $20 a barrel, and a thousand barrels that sold at
$30, and then value all of the ANS crude based upon this
other crude, the thousand barrels that sold at $30. Because
that was not the market price at that period. It was the
market price for maybe some guy who had a refinery who had a
crude outage. He needed crude that day and there was
somebody with a ship that day in the vicinity. What's he
gonna do? Shut down the refinery or buy that crude. That's
not an arms-length transaction, first of all, you got
somebody with a lot of power; the guy with the crude. And,
somebody in a pretty bad position; a refinery with no crude.
These things will help. Am I willing to pay for them by
Section 1? Absolutely not. Do I think they're the right
thing to do anyway? Absolutely yes. But not in Section..."
Number 068
CHAIRMAN VEZEY: "You are confusing me there because I
thought I heard you say that we don't need to look at
foreign crude to evaluate Arctic North Slope crude."
Number 069
SAME UNIDENTIFIED SPEAKER: "You don't have to but if you go
back, and I'll go back to the royalty settlements, and a
statement was made by the attorney general that those who
entered into in the past several years and they seemed to be
working well, and what I hear from the folks on our side is
that they are working well. And what that basically does
is, it's a formulary approach that puts different types of
crudes in with different percentage of the total hundred
percent allocated each of those, adds them up, and you come
out with a value. And it's a close approximation as to what
is happening directly in the market with respect to ANS
sales. So, it's a substitute that seems to track well."
Number 082
CHAIRMAN VEZEY: "So, I would interpret your testimony
meaning that you would not advocate repealing Section 3 on
this bill."
SAME UNIDENTIFIED SPEAKER: "I am opposed to 377 as long as
Section 1 is in there."
(short break on the tape)
Number 084
REPRESENTATIVE DAVIES: "...that portion of liquid
hydrocarbons extracted (indiscernible) that could have been
extracted through mechanical separation by a prudent
operator (indiscernible). How do you know what that is?"
MR. BOTELHO: "Mr. Chairman, good question. And the process
engineers, the production engineers have to look at that,
look at the stream and decide. And, in all candor, I am not
sure how difficult a question that is. I am not sure how
illusive a question that is. I am not sure how great the
room for differences is. I am told, and it's my
understanding that it's a fairly easily applied objective
standard that's been around for a long time. But I can't
say that I know that as my personal knowledge."
Number 109
CHAIRMAN VEZEY: "Are we on Section 7?"
Number 110
MR. BOTELHO: "Mr. Chairman, I believe that this section
takes up a subject that we are not prepared to talk about.
That is, you may be, but I am not. I think that brings us,
presumably, to Section 16, Mr. Chairman."
Number 119
MR. HOSIE: "With that, let's move to Section 16, which
starts on page 10. Section 16 simply clarifies that Section
1 of this legislation is declaratory of existing law. To
put that plainly, that the division's longstanding
interpretation of the statute of limitations; that is, that
amendments relate back, is the proper interpretation and
that legislation, Section 260, wasn't designed to create a
new and harsher rule for the state of Alaska in tax
proceedings. This is a clarification of a prior piece of
legislation and a recognition of a longstanding departmental
division policy."
Number 136
MR. BOTELHO: "Mr. Chairman, you will recall that this was
in an earlier version, expanded into some two and a half
pages of findings which no longer accompany this bill."
CHAIRMAN VEZEY: "Representative Bettye Davis."
Number 142
REPRESENTATIVE B. DAVIS: "Actually he answered my question.
I was going to say, did this take the place of the findings
that was in the original bill? Would this imply that this
is the same?"
MR. BOTELHO: "Mr. Chairman, that is correct."
REPRESENTATIVE B. DAVIS: "Because I thought that was one of
the compromises that you made with the industry was to
remove the findings."
Number 148
MR. BOTELHO: "Mr. Chairman, and the compromise was to leave
this language. We had both this language and the findings.
The compromise was to delete the findings."
Number 152
REPRESENTATIVE B. DAVIS: "Could you clarify to me then,
what is the difference because I see it as the same. You
just don't have the two pages but you're referring back to
it anyway."
MR. BOTELHO: "Mr. Chairman, once again, the compromise was
simply the insistence that the findings be deleted. I am
not in a position to speak for why, from the other
negotiator's standpoint, the deletion was satisfactory and
this remained. We obviously felt very strongly that both
the findings and this section be retained. The compromise
was to have the findings deleted and I agreed to do so."
CHAIRMAN VEZEY: "Representative Davidson."
Number 168
REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. Mr.
Attorney General, what is the effect of the deletion of the
findings?"
MR. BOTELHO: "Mr. Chairman, courts look to findings to have
some sense, maybe broader sense of the purpose the
legislature had in mind when it enacted law. So you find
them not employed with great regularity, but over issues
that are particularly complex, they provide some framework
much as you use letters of intent. The Mental Health Lands
dispute against something very complex, had extensive
findings. To recite the history, how did we get to where we
are right now? Why is it necessary for this legislation to
be enacted? And basically that is the purpose of findings.
We obviously sought to have that explanation available to
the court and with its deletion our one safeguard again, in
terms of giving guidance into the courts and having to
resolve not only the three-year but the six-year statute is,
of course, not in litigation any further, but might very
well be soon. Section 16, I guess, is the final safeguard
we see to making sure the courts understand
(indiscernible.)"
CHAIRMAN VEZEY: "Representative Davidson, please continue."
Number 196
REPRESENTATIVE DAVIDSON: "So is it a fair statement to say
that absence section of findings, we are giving less
guidance to the court, this would probably tend to encourage
and prolong litigation rather than resolve it more quickly.
And the reason I ask the question is, we remember back in
Section 1, we said now after five years, it's over as far as
assessments are concerned. So I don't see how, by deleting
the findings and thinking about that five years back there,
and now here we have come down to a situation where we've
encouraged more uncertainty as far as giving the court some
kind of guidance."
Number 212
MR. BOTELHO: "Mr. Chairman, I suspect that, or I shouldn't
say I suspect, the court could look at the act and simply
say that given the expressed departure from prior practice
in Section 1, that that already sheds some light on the
legislature's view of what the existing law is. Mr.
Chairman, I am not entirely certain that I can, that I have
the entire gist of Representative Davidson's question, but I
consider this feature an essential feature of the
legislation which the administration was willing to
compromise on, that it is an essential element."
Number 225
REPRESENTATIVE DAVIDSON: "Well Mr. Chairman, excuse me.
This seems to be very crucial to what we're doing here
because it seems that we're restricting the court's ability
to get to the bottom of quantifiable value or how we reach
finality in these matters of what is owed the treasury. I
think that it is, I don't know, that we should pursue this
more."
MR. BOTELHO: "Mr. Chairman, if I might speak to that. The
deletion of the findings has not rendered this legislation
ambiguous or unclear. Section 1 is explicit. The five year
rule is explicit. The rule that you can (indiscernible) for
pre-existing cases is likewise explicit. This Section 16
makes it even more explicit that this act is designed to
create (indiscernible) prospectively and endorse an existing
division policy (indiscernible). And so the findings are
not likely to encourage litigation or weaken the state's
position in litigation. This bill, unlike the pre-existing
Section 260, is not ambiguous."
CHAIRMAN VEZEY: "Representative Phillips."
Number 248
REPRESENTATIVE PHILLIPS: "Thank you, Mr. Chairman. Bruce,
between Section 16 and Section 17, one of them stating
specifically identifying declaratory existing law, and then
Section 17 having the two new effective dates in. There is
no conflict between those two, is there?"
Number 255
MR. BOTELHO: "We do not see any, that's correct."
Number 256
CHAIRMAN VEZEY: "Representative Bunde, do you have your
hand up?"
Number 257
REPRESENTATIVE BUNDE: "No, sir. Thank you"
Number 258
CHAIRMAN VEZEY: "Okay. Moving on to 17."
Number 259
MR. BOTELHO: "Mr. Chairman, Section 17 simply makes clear
that this bill will apply to currently pending actions; that
is, litigation with taxpayers. That is the long and short
of that section."
Number 265
CHAIRMAN VEZEY: "Questions?"
Number 266
MR. BOTELHO: "Mr. Chairman, Section 18 is the one
retroactive provision of the bill and that retroactivity
provision applies to the, in essence, the gas liquids
question, and is the section which would provide the
economic benefit to taxpayers as a result of our willingness
to treat these gas liquids as gas rather than oil."
CHAIRMAN VEZEY: "Section 19."
Number 288
MR. BOTELHO: "Mr. Chairman, again, it provides for the
immediate effective date of all those sections pertaining to
oil and gas taxation. The remaining sections are affected
by Section 20 which provides for an effective date of July
1, 1994. My recollection is that when it says, `Take effect
immediately under AS O1.10.070(c)' that it makes it
effective 90 days after the Governor's signature
(indiscernible) I believe it is two thirds of the vote and
it becomes effective at the time of signature."
Number 289
CHAIRMAN VEZEY: "Well, we have gone through the bill. Do
you have any other general or specific comments that you
would like to make?"
MR. HOSIE: "With the Chairman's indulgence, two points that
have not been touched on in any detail this morning, and
I'll keep it brief. First, this bill does not mean that the
taxpayers necessarily will pay the assessed amounts. It is
not about the merits of the assessed taxes, whether in fact
they are owed or not owed. What this bill does is give the
department and the state its day in court. That's all. If
the taxes are not proper, a court will so rule and they will
not be paid. Second, if the taxpayers are right and if
adjustments can only come in their favor after three years,
that creates a tremendous incentive to delay. Because if
the taxpayers can drag it out past three years, the music
stops and the number can only go down, regardless of what
the new evidence shows. Regardless. And so there's a
tremendous incentive to delay and that perverts the process
to some extent. The process should be and is about
determining the correct tax due, the proper tax. After
three years, under the taxpayer's view, the process is no
longer about determining the correct tax. Instead it's
about how successfully the taxpayers can chip away at a pre-
existing assessment. And that's not how it is designed to
work. I have nothing further. Thank you Mr. Chairman."
MR. BOTELHO: "Mr. Chairman, thank you for the time you have
devoted to this issue already. I am certain you will have
(indiscernible) very enlightening information to come from
various taxpayers or taxpayer organizations. I would only
ask that if there are additional amendments proposed during
the course of the testimony that you take today, that we be
given an opportunity to comment on the impact that that
proposed modification or modifications might have. Other
than that, Mr. Chairman, we are certainly prepared to answer
any additional questions and to allow others to appear
before you now."
CHAIRMAN VEZEY: "Okay. Earlier there was a question asked,
if I understood it correctly, to the effect of, if the state
loses in the case that's going to court next week, at the
Supreme Court level, what would that do to its claim that it
has so many billion dollars outstanding in back taxes. I
believe the answer that you didn't know those numbers, you
couldn't answer it. But more specifically, of all the, I
believe, 42 cases that are pending, how many of those have
the taxpayers not signed an agreement in accordance with
43.05.260, paragraph (c) (3), extending the tax liability
period?"
MR. BOTELHO: "Mr. Chairman, I think that would be a
question best put to the Department of Revenue. I do not
know the answer to that question."
CHAIRMAN VEZEY: "Any questions of the attorney general?
Representative Therriault."
Number 339
REPRESENTATIVE THERRIAULT: "Yes. That last comment by Mr.
Hosie. Your comment that industry would be encouraged just
to drag things out past the three years, but now giving them
the five years, it's the same thing. I mean all we're
talking about is a different timing and I don't know if it
is just that the two years extra gives the administration
that much of a greater feel of comfort, but the argument you
just made is to never have an absolute cut off date but yet,
being proposed in this bill, by the administration, is a cut
off date. So you can't have it both ways."
Number 348
MR. HOSIE: "Mr. Chairman, that is exactly right. The five
year cut off is a five year cut off and the division will
have to conclude the audit and assessment process in five
years. If it doesn't, it will lose the right to assess and
collect the correct tax, regardless of the evidence
discovered after the five years. And yes, there is an
incentive to delay. But five years is not three years and
1994 is not 1979 or 1980, for all of the structural reasons
that we have discussed earlier. But this five year rule
comes with cost and consequence. They have to get it done
in five years. And without question, the industry will
understand that it's a five year rule and that if the
process goes beyond five years, suddenly changes can only go
one way, and that's in their favor."
Number 361
REPRESENTATIVE THERRIAULT: "So the way the industry is
interpreting the three year is that you have to make that
assessment before the three year cut off and all cases have,
some assessment has been made within that three year window.
So, if the state should lose in court, what you're losing is
only those increased assessments past the three year date.
Is that correct?"
MR. HOSIE: "That's correct."
REPRESENTATIVE THERRIAULT: "So, when we start talking about
the total outstanding tax obligation, six billion but this
only potentially impacts three billion, of that only one
billion is actual tax, but of that actual tax, what
percentage now was after the three year period? Because it
seems like what's being portrayed to the public is, that
should the state lose in court, it's zero, we get zero. And
basically, what we do is we just drop back to the assessment
that was in the three year period of time which is clearly
not zero."
MR. BOTELHO: "Mr. Chairman, as I indicated early on, there
are a billion dollars specifically at stake with the
assessments in addition to those issued timely in the
taxpayer's perspective; that is, within the three year
period, we are talking about an additional billion dollars
outside the three year period that's at risk."
CHAIRMAN VEZEY: "Is that a billion dollars in taxes, or a
billion dollars in taxes, penalty and interest?"
Number 383
MR. BOTELHO: "That's taxes and interest. So what you're
talking, again, is an indicated ratio of about one to one
six, something in the neighborhood of $400 million in basic
tax, and then an additional $600 million or so in interest
on that."
Number 387
CHAIRMAN VEZEY: "So that brings up a question in my mind,
just trying to keep things in perspective. The amount of
tax that we are disputing is in the range of one percent,
five percent of the total taxes paid?"
Number 392
MR. BOTELHO: "The amount in dispute in terms of tax is
probably is in that range, five percent, and I think this is
a very important point that you have raised, Mr. Chairman,
and that is, taxpayers have made billions of dollars in tax
payments to the state and while a billion dollars or three
billion in tax and interest seems like a staggering amount,
it is a relatively small percentage of the overall taxes
paid by taxpayers, these corporate taxpayers, to the state.
And your estimate, Mr. Chairman, of say five percent, I
suspect is certainly within the range of what this is really
about in dispute."
CHAIRMAN VEZEY: "Any other questions of the -
Representative Nordlund."
Number 404
REPRESENTATIVE NORDLUND: "Thank you. Yes, I'm just
wondering Mr. Chairman if once we hear from industry
representatives if we might be able to have the attorney
general and Mr. Hosie back up here to answer any further
questions that we might have, or respond to industry's
concerns."
Number 408
CHAIRMAN VEZEY: "We could probably arrange that. We'll
also be hearing from the Commissioner of the Department of
Revenue, too."
MR. BOTELHO: "Thank you, Mr. Chairman."
CHAIRMAN VEZEY: "Further questions?" Representative Kott."
Number 411
REPRESENTATIVE KOTT: "Thank you, Mr. Chairman. I want to
get back to, digress a little bit, to the very beginning of
our conversation here in the debate on this bill. We were
talking about the relate back doctrine. Can you tell me
when that doctrine was first implemented by the courts?"
MR. HOSIE: "Mr. Chairman, that is a common law doctrine.
It's been in existence in the common law for probably
hundreds of years. It's a longstanding traditional
doctrine, like the doctrine of equitable estoppel or
tolling. It was recognized in this state, explicitly in the
rules, in Rule 15(c) when the Alaska Supreme Court first
promulgated the Rules of Court. But it pre-dates the Rules
of Court as a longstanding common law doctrine and rule.
And that's not unique to Alaska, that was true in the law of
every state that I have examined."
Number 426
MR. BOTELHO: "Mr. Chairman, just to follow up. The first
time that the doctrine was explicitly articulated as a court
rule really was in the process of developing the Federal
Rules of Civil Procedure which took place in the mid-
thirties. Initially in the mid-thirties is my recollection,
maybe as late as the forties. That was the procedure also
used by the territorial courts obviously of the territory of
Alaska. Most states, although not all, have adopted some
modification of the Federal Rules of Civil Procedure to
guide them, and Alaska was no exception."
Number 434
MR. HOSIE: "And, if I might add, we have cases on that
point should you wish them provided."
Number 436
REPRESENTATIVE KOTT: "Mr. Chairman, a follow-up.
CHAIRMAN VEZEY: "Please."
REPRESENTATIVE KOTT: "SB 511, I believe, was the original
bill that was transmitted back in codifying the law back in
1976. And that bill, which is of the bill that we are
changing today or least looking at the change, allowed for
three exceptions. Why, perhaps, was this particular
doctrine not included as one of those exceptions given the
fact that it is a key component?"
Number 442
MR. BOTELHO: "Mr. Chairman, my own view is that, again, the
doctrine was so universally accepted that it didn't need
articulation. Just as I pointed out earlier, you cannot
find anything in Chapter 09.10 which outlines every other
statute of limitation that the state has today governing any
kind of conduct. You'll see no reference at all to the
doctrine of relation back. Yet the courts have universally
applied that doctrine to those other areas."
Number 450
MR. HOSIE: "And if I might add, Mr. Chairman, it's not
really an exception to the statute of limitations. That's
an argument that Exxon has advanced consistently in the case
now pending before the Supreme Court. They say the statute
has three explicit exceptions. It doesn't have four and
relation back is a fourth exception. It is not an
exception. The exceptions are situations where the statute
doesn't apply. For example, if a taxpayer commits fraud, or
for example, if the taxpayer enters into a written agreement
to suspend the statute of limitations. Those are exceptions
to the statute. The relation back doctrine addresses a
different question which is, what happens if you file your
case or serve your tax assessment in a timely basis but
amend it later? It's a different issue, it's not an
exception issue. And to the extent that taxpayers have
characterized this as an exception issue, they have
mischaracterized it."
CHAIRMAN VEZEY: "Representative James and then Green."
Number 462
REPRESENTATIVE JAMES: "Thank you Mr. Chairman. Just a
couple of things. One of the problems that I'm having is
the description of what you call an assessment. And what is
the audit portion of the procedure and what is the
assessment portion of the procedure? And in reading some of
the things that I have in my files here about the numbers of
additional assessments that were issued, and whether or not
you are in an audit process or whether you're in an
assessment process. And it would seem to me that, yes, when
you go from filing an assessment and you go through an audit
process that maybe there might be some things that you might
find that would be changing. But what I see as troublesome
is that there are these continual new assessments, not part
of an audit, not working towards an end result, but
continually doing an additional assessment. And every time
you do an additional assessment it amounts to more
preparation by the taxpayer to contest the assessment as
opposed to going through just the normal audit process and
finding new and more material. And then proceeding even
further than that, because I did find in the statutes
someplace an Attorney General's Opinion which defined an
assessment as a final billing for taxes. And that would be
what I would consider a final billing. But there is also,
if the (indiscernible) statute of limitations is about to
run out, and you have the opportunity to do a jeopardy
assessment, so that you've got it high enough, which is a
typical IRS trick. If they can't get it done in time they
just give you a big one and then you've got to fight this
big one all the way to the end. And so I guess that I'd
like to have you define for me, what is the difference of an
ongoing audit and finding additional information, and
periodically giving new assessments."
MR. HOSIE: "Mr. Chairman, the processes overlap. You have
an ongoing audit and you have an initial assessment at some
point in that process. But as soon as the first assessment
goes out, the discovery process doesn't stop. The division
continues to look for evidence, continues to look for
documents, continues to talk to witnesses. That's an
ongoing process. It's the basic preparation of the case for
resolution. And during that process, the amendment may be
assessed as new facts are learned and as the auditors
develop a greater understanding of what, in fact, happened.
And so it - the process - it all goes together as a whole.
There is not a separate audit period that is the only time
when the auditors get to look at the company's documents and
ask questions. That's ended with an assessment that then
goes directly to court. It's more that the assessment marks
the initial bill to the taxpayer, that then starts the
adjudicatory process. The taxpayer, receiving an
assessment, can either pay it, which ends the process,
that's it, you pay it, it's over. Or you can not pay it,
hold onto the money and say `I am not going to pay it,
you're wrong.' And that's the dispute resolution process.
But during that dispute resolution process the Audit
Division continues to get information to bolster its
position, to test the correctness of its own assertions.
And that continues with the formal hearing. The statute AS
43.05.240 (b) & (c) provides that the formal hearing officer
may subpoena witnesses, take new evidence all to determine
the open, quote `correct tax due' closed quote. So the
process, even at that point, is about getting to the right
tax amount."
MR. BOTELHO: "Mr. Chairman, I think it's also important
when Mr. Hosie says the taxpayer can simply pay the tax
assessed at whatever stage of the amended assessment. That
is not to necessarily imply that the taxpayer has conceded.
The taxpayer can stop the clock and the amount by filing
with the initial assessment, paying that amount and filing a
request for refund. The taxpayer is entitled to a hearing
and the maximum which the state may hold the taxpayer to is
the amount already paid. Taxpayers have always had that
opportunity, that is to stop the clock, to stop the interest
running, by simply paying the assessment and filing a
request for refund. Why haven't they done it? Well, in
fact some taxpayers have done exactly that. Most, however,
and again I think the question is best placed to industry
representatives, but our view is that most have not done so,
historically, because the interest that they could earn on
keeping money in dispute as opposed to turning it over to
the state for the state to manage that money, was really
losing value. Our interest rate, beginning 1991, was a
disincentive for the industry to have to make available.
That changed with the 11 percent compounding. And I think
it also coincides with a lot more energetic efforts both on
the part of the state and the industry to resolve these tax
disputes. But the underlying point I'd like to make is that
the clock could have stopped running on these longstanding
tax disputes a long time ago, the taxpayers simply had to
pay and make a request for refund and the maximum the state
would be allowed to collect was the amount already paid in,
that it was really a ceiling from which the taxpayer could
work downward. I think the other concern, and it's
certainly a legitimate one, about seeing amended assessments
time after time. It's a reflection, obviously, that the
process is ongoing and new information is constantly coming
to light, but I should also point out, again, that taxpayers
and the structure have a right to go immediately to formal
hearing and get the matter over with immediately. There is
one taxpayer that has consistently done that and that
taxpayer, and it is a large taxpayer, has by and large
managed to resolve most of its outstanding disputes with the
state. Other taxpayers have elected not to use that process
and instead have preferred to use the informal conference
process which has no fixed time limit and has the
consequence of dragging out over a long periods of time.
But there again, a taxpayer has the right, at any time, to
go to the commissioner and say, `At this stage, I'd like to
forego my informal conference proceedings and move directly
to formal conference. Please appoint an administrative law
judge to hear the case.'"
CHAIRMAN VEZEY: "Thank you."
REPRESENTATIVE JAMES: "I'd like to follow up, Mr. Chairman,
if I might. The troublesome part for me is that the
language in 260 is very explicit, it says that the
assessment must be made within the three year time frame.
But even more complicated to me then, is the issue that in
270, it says the six year clock starts ticking when the
assessment is made or the three years, whichever is the
latter of the two, you know, at that time, that starts the
six year. So I guess the biggest problem I have is the term
`assessment.' What does an assessment really mean? Because
that seems to be a critical thing that is listed in both of
those statutes as to what sets off the clock."
MR. BOTELHO: "Mr. Chairman, I need to defer to Mr. Hosie."
Number 567
MR. HOSIE: "Mr. Chairman, the assessment is simply the
initial bill to the taxpayer. There are different kinds of
assessments under the different kinds of taxes. To
illustrate under now repealed 43.21, the separate accounting
tax regime, the first assessment was known as a desk
assessment and it was an assessment based only on the
documents given to the state by the taxpayer. But that's
still called an assessment in the code. Most generally it's
just the initial and preliminary bill to the taxpayer and
it's the legal document that starts the process. It's
really the trigger - it starts the process just the way a
complaint in a civil action starts the civil case going.
It's not to say that it's the last word or the final
expression of the assessed amount, it simply starts the
process. That was something the Supreme Court explicitly
recognized in the recent Budget Reserve Fund Case, the
Hickel v. Halford case. They said an assessment starts a
quasi-adjudicatory process, it is just like a civil
complaint. It is the trigger for all of these things and
there is some room for ambiguity."
Number 583
MR. BOTELHO: "Mr. Chairman, would it be helpful to the
committee to actually see what an assessment looks like? I
would be glad to give you a copy so you had some idea what
it looks like. Some of you may have seen one from the IRS,
I'm not sure." (some laughter.)
Number 589
CHAIRMAN VEZEY: "It certainly, you know, if you would like
to present one to us, we'll certainly distribute it to the
committee. I personally don't have any desire to see any
more of them, but that's alright. Representative Green."
MR. BOTELHO: "Thank you very much for your time."
CHAIRMAN VEZEY: "We have another question, if you have a
few moments."
MR. BOTELHO: "I do, Mr. Chairman. I have all day."
Number 591
REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. I'm sorry
to go back on this common law (indiscernible due to static).
It seemed to me early on, Mr. Hosie referred to the fact
that a lot relies on the common law relation back doctrine
and you mentioned that common law is commonly used, such as
estoppel. Can you explain to us what may or may not carry
forward as acceptance of common law? I'm thinking of a man
and a wife live together for a while, common law said they
were married after a certain length of time. Or adverse
possession. Are those automatic that they are incorporated
in state law or do they have to be established by some other
method than state law?"
Number 601
MR. HOSIE: "Mr. Chairman, they have to be recognized by, in
the first instance a court, a judge has to look at it and
say, `Alright, in this state we recognize common law
marriages.' And that establishes the common law marriage.
And that common law marriage doctrine exists until a statute
is passed that says, in this state we will no longer
recognize common law marriages. And so the common law co-
exists with statutory law. Of course the statutory law
always governs. But there are many common law doctrines
that serve to fill in the gaps of statutory law. There
certainly isn't a statute that addresses every possible
issue or claim that could arise and courts commonly refer to
common law to fill those gaps. And relation back is one
example. Equitable estoppel is another example. This is
particularly true in the tax area where the courts have
always recognized that the power to tax is one of the most
important powers of the sovereign, and that you can't see a
limitation in that power unless it's explicit. And so, the
common law doctrine there would be sure to survive unless
the legislature explicitly said no, we want a different
rule; we'll live with the limitation."
Number 616
REPRESENTATIVE GREEN: "If I might follow-up on that. I'm
confused and I'm sorry about this. But I thought you said
earlier that it was an implied law here that judged no
court, or that no case law has been established to imply
that to the state of Alaska."
Number 620
MR. HOSIE: "Mr. Chairman, I can't remember if there is a
specific Alaska case that recognizes the common law relation
back doctrine. There are many cases from many other
jurisdictions including the federal jurisdiction that do.
That's just the rule. I've seen nothing that suggests that
Alaska would have a contrary rule. And the doctrine did
exist in the state prior to the formulation of the Alaska
Rules of Court, specifically 15(c), that made it explicit
and a court rule. I mean, it didn't arise for the first
time in this state with the passage of Alaska Court Rule
15(c). That simply recognized what had long been present
and I am sure that I could find either a treatise or a case
that says that."
Number 635
MR. BOTELHO: "Mr. Chairman, in fact the Civil Rule 15(c) as
published, has a long list of Alaska cases that deal with
the applicability of that doctrine on statute of
limitations, so there is extensive Alaska case law on it as
well, not in the tax arena. Not dealing with this specific
statute, but a variety of those that arise in the civil
context."
REPRESENTATIVE GREEN: "Thank you, Mr. Chair."
CHAIRMAN VEZEY: "Thank you. Representative John Davies."
Number 636
REPRESENTATIVE DAVIES: "Thank you Mr. Chair. You had
mentioned the possibility of paying and then requesting a
refund. I had two questions that relate to that. One was,
if a taxpayer does that and then requests a refund and is
subsequently is granted a refund, what is the interest rate
on the money?"
Number 642
MR. BOTELHO: "My recollection right now is the state is
required to pay back on a rate equal to that being charged,
that is 11 percent compounded."
Number 644
REPRESENTATIVE DAVIES: "So at the present time it would be
11 percent compounded, and in the past it would have been
the..."
Number 645
MR. BOTELHO interjected: "It would be for whatever rates
were in effect at those applicable times, that's correct."
Number 646
REPRESENTATIVE DAVIES: "If this situation -- I guess I
could make a question -- why is this situation not
symmetrical in the sense that, if the taxpayer requests a
refund, isn't that also establishing a state of conflict
over what was due and so why wouldn't discovery continue
during that state?"
Number 649
MR. BOTELHO: "Mr. Chairman, it would. The state is
obviously able to use whatever evidence becomes available to
show that the amount paid are amounts of money which would
be retained by the treasury. The general principle, and not
unique to Alaska, in terms of being able to ask for a
refund, is that making payment on the assessment sets the
ceiling of the government's entitlement to the money."
Number 656
MR. HOSIE: "I could add one point to that, Mr. Chairman.
There is a United States Supreme Court case dealing with the
federal tax area and the refund context that is precisely on
point to the pending Supreme Court case here. And the
federal supreme court case, a corporation filed a claim for
refund. And there is a federal statute that says if you
want to file a claim for refund, do so within two years or
you'll lose your right. They filed within two years but the
claim they filed was defective, it was fatally defective,
and their claim was going to be denied. So they amended it
after the two year statute had expired. The issue faced by
the court was whether that amendment related back to cure,
if you will, their first filing. Supreme Court ruled that
it did, under the relation back doctrine, analogizing to
civil process and civil procedures. The significant thing
about that case is that there's no explicit federal law that
says in the refund context, relation back is okay. It was
recognized as a common law doctrine. That is still good law
today on the federal level. And that is precisely the
situation we find ourselves in here. And to illustrate that
further, what if the shoe were on the other foot? What if
the taxpayer filed a claim for a refund in a timely fashion
and then after the statute had expired, discovered that in
fact, it had a larger claim for refund? Would it not want
to amend to get the correct amount back? And if it did
amend, would it not argue that the amendment related back?
After all, the basic taxes were already in dispute."
CHAIRMAN VEZEY: "Representative Gary Davis, did you have
something?"
Number 676
REPRESENTATIVE G. DAVIS: "Yes, Mr. Chairman, thank you.
Mr. Attorney General, you mentioned that after the initial
assessment, if the bill is paid, it's over with. Does that
mean paid cash-in-hand or does that mean accepted and the
six year payment starts?"
Number 678
MR. BOTELHO: "Mr. Chairman, the concept behind the filing
is that the taxpayer disputes the assessment, but chooses
because it wants to stop interest from running or wants to
stop the department from being able to issue additional
assessments, either before or after the three year period.
It simply pays the assessment, whatever that amount is. It
stops, what it does, it simply stops the department from
being able to get anything more."
Number 679
REPRESENTATIVE G. DAVIS: "So it is cash paid?"
Number 680
MR. BOTELHO: "Yes, it is."
CHAIRMAN VEZEY: "Representative James."
Number 689
REPRESENTATIVE JAMES: "Thank you, Mr. Chairman and Mr.
Hosie, your example that you gave of the federal case in
the tax court of where the taxpayer was allowed to amend the
request for refund. And earlier you said that in this
state, the court, when there is not implicit instructions,
they lean towards the sovereign. In the federal courts for
taxes, do they lean towards the sovereign or towards the
taxpayer?"
Number 691
MR. HOSIE: "They would lean toward the sovereign as well
and not withstanding...."
TAPE 94-62, SIDE B
Number 000
CHAIRMAN VEZEY: "If there are no further questions, I want
to thank both of you gentlemen very much for your time and
your input. You've been very helpful. The time is 2:44,
and we will take an at ease until 3:00."
Number 008
CHAIRMAN VEZEY: "I call the meeting back to order. The
time is 3:05, May 13, 1994. Continuing in our testimony on
SB 377. I would like to go next -- we've heard about four
and a half hours of testimony from the Attorney General's
Office, I'd like to kinda change the testimony a little bit
and go to somebody from industry. The first person on our
sign-in list is Mr. Paul Sullivan. Mr. Sullivan, if you
would care to join us up here."
Number 028
PAUL SULLIVAN, GENERAL TAX COUNSEL, EXXON COMPANY, U.S.A.:
"Mr. Chairman and the members of the State Affairs Committee
and Judiciary, and Oil & Gas, my name is Paul E. Sullivan
and I am the general tax counsel for Exxon Company, U.S.A.
I want to thank you for allowing me this time to be heard on
this very important subject. We had a very interesting
thing happen here this morning. We had Mr. Hosie, when he
started out, present the state Supreme Court argument to
you. The only response I have is that this legislature
should allow the state the opportunity to make its arguments
before the Supreme Court. That's the right place for this
to be decided. The attorney general this morning talked
about checks and balances. I would point you to Sections 16
and 17 of this bill and tell you that the bottom line of
those two sections is to take away from Exxon Corporation
its right, its day in court, the ability to be heard before
the Alaska Supreme Court, and to have that court decide what
this statute means, what it meant back in '76 and what it
means today, before any action on SB 377. There's been a
lot of talk about amendments and I've only got one; delete
Section 1. Mr. Hosie has spent a lot of time talking to you
about relation back theory. He has pointed out to you that
this is the heart of the state's appeal to the Supreme
Court. He has said that it was not addressed by the
Superior Court. Those of you who have been to law school
may have heard the example that's used, what happens when a
case..."
Number 032
CHAIRMAN VEZEY interjected: "There's none of us that have
been to law school, so thank you." (laughter)
Number 033
MR. SULLIVAN: "Well, it's a simple little example. One
neighbor sues another and claims that the neighbor borrowed
his lawn mower. When he returned the lawn mower, it was
broken. The response of the other neighbor to the suit is,
1) I didn't borrow your lawn mower, 2) if I borrowed your
lawn mower, it was broken when I borrowed it, and 3) when I
returned it, it wasn't broken. Now the court decides what
it's gonna do with that. And if it decides that the
neighbor never borrowed the lawn mower, then it never has to
address the other issues. Basically, what happened in the
Superior Court was that that court held that there was a
statute which was plain on its face, which was unambiguous
and which allowed for three stated exceptions. Those
exceptions were: If the taxpayer failed to file a return,
the statute did not run; the second exception was if it was
taxpayer fraud; and the third exception, and one that has
received little notice today, is where the taxpayer and the
Department of Revenue enter into a written agreement to
extend the statute of limitations. Three years has been
talked about as a cut off date. I can tell you that in
every instance where Exxon Corporation has been requested by
the state, the Department of Revenue, to provide an
extension, we have done so. I can tell you that on average,
the state has had five to six years to audit. From 1978
through the last audit period they have done, 1987 -- 1989,
I'm sorry. And remember, this is 1994. Why isn't there a
problem with the 1990 return? It's because we've given
extensions. In some years we have given extensions of up to
six years which says that the department has had the three
years under the statute plus another six years by agreement
with the taxpayer, for a total of nine years to do the
audit. Every assessment that came during that nine year
period is a valid assessment. There is no issue as to the
validity of those assessments. What we are talking about is
any assessment received after the three years plus any
period agreed with the taxpayer for extensions. That's one
point I want to make. Another point: The attorney general
talked about, somebody asked a question about changing the
statute again in the future, and the attorney general's
response was, that was a possibility but we could count on
the wisdom of the legislature to make that decision on
changing the laws. Prospectively that's okay.
Retroactively, is questioning the wisdom of a prior
legislative decision. One which is under review by the
Supreme Court on Wednesday. The attorney general also
talked about a knowledge and data base that the state has
invested in but refuses to use in the tax cases. He says
there's no conflicts with industry under royalty. I think
he is pretty much correct on that. The question is, why not
use these royalty values for tax purposes? The
administration refuses to do that. The attorney general
indicated that the taxpayers want to use it for this
contentious period that existed the later half of 79 and the
first half of 80 on the ceiling price issue on federal price
controls. I can tell you that Exxon has never suggested
that royalty values be used for that period. I can tell you
that nowhere in any negotiations with the state on revisions
to how you determine value, have we said that. I can tell
you that we have specifically talked about excluding that
period and using royalty values for other periods. The
attorney general talked about other states and the IRS and
the department's longstanding interpretation being
consistent with these other state laws. The first point I
want you to remember - none of these states, and the federal
government change their law retroactively. That may be
their law, but they adopted it prospectively. The attorney
general, in response to a question said that litigation will
be -- the question was, will it be less or more with this
bill, and he said, without a doubt, less. At the same time,
the attorney general says that future value may be the same
as royalty but may not. The word `may' whenever I see it,
`may' equals litigation. If nothing else, there will be
litigation about Section 1 and its retroactivity and whether
that retroactivity is constitutional.
"Mr. Hosie talked about spot prices. Before the break he
talked about 1984 forward and a developed spot market. When
we came back from break he said he did not mean to indicate
that there wasn't a spot market in the late 70s and early
80s. In the late 70s, two to five percent of crude oil
traded on the world markets, and I'm not talking ANS, crude
oil on the world market, two to five percent was traded in
the spot market. The rest was under long term contracts.
Now let's look at ANS crude in that period. Twenty percent
of the ANS crude that was sold, and not transferred
internally to a producer's own refinery, but sold, was sold
for cash. And I'd ask you the question: Which is the more
valid valuation for ANS? Which of those two is the more
valid valuation?
"We had some discussion about NGLs. I'm talking about this
before I get to my testimony. The attorney general made a
very telling comment. He made two. First, he said that
this was a trade off in this bill; give me Section 1 and
I'll give up NGLs. But later on he told you that the state
of Alaska's position on NGLs being oil, is unique. Let me
tell you the flip side. Every producing state, except
Alaska, treats NGLs as gas. What is the value to a producer
of having to defend against a position that is unique to the
state of Alaska? I submit the only thing that is going to
be saved by that section is litigation, period. So yes,
there is one instance in this bill where litigation will be
reduced. And that's NGLs. But all it's giving the
producers is exactly what every other state already says;
natural gas liquids are gas.
"The attorney general said that Section 16, when we got into
a discussion of the findings that used to be in SB 185
versus the declaration in Section 16 of this bill, he said
it was a compromise with industry. Exxon is part of the
industry up here. Exxon is not part of that compromise.
Mr. Hosie says what they're asking you to do in this bill in
the prevailing value section just gives the state its day in
court. I submit that Section 1 takes away Exxon's day in
court. I have a case which has progressed through the
state's system. Assessment, protest, informal conference,
formal conference, Superior Court, and is days away from the
Supreme Court. And this bill will, if passed, allow the
attorney general to fly up to Anchorage, hand the court this
legislation and say, the case has been mooted because the
law that you're being asked to review no longer exists.
That is unfair. That is not right.
"A question was asked about what is an assessment. An
assessment is any bill the taxpayer receives while the
statute of limitations is open. If I have extended the
period an additional six years for a total of nine years,
the Department of Revenue can issue me 200 assessments if
they please during that period, each and every one them is a
valid assessment. And I have never said otherwise. But
once the statute of limitations, including any mutually
agreed extensions to it has run, something I receive on a
piece of paper is not an assessment. It is null and void
and the statute says so and the superior court says so. Mr.
Hosie near the end said, `What if the shoe was on the other
foot? Wouldn't the taxpayer want to amend?' Without going
into detail, the shoe was on the other foot, with Exxon.
The attorney general and the Commissioner of Revenue said,
`Sorry folks, the three year statute has run.'
"I'd like to turn to my prepared comments. There are three
things that I'd like to accomplish here today. I'm going to
give you some concrete information to refute the section of
the bill which states that this is declaratory of existing
law. The declaratory of existing law is no different than
the two pages of findings that were in the prior bill; they
are the same. I want you to apply your own judgment and
common sense to decide whether, what those former findings
now incorporated into declaratory formal law, are true.
Next I'm going to tell you what's actually happened in real
cases and finally I'm gonna tell you about the negative
effects that this piece of legislation could have for the
state and for its taxpayers. Legislative bills with
retroactive application affecting tax liabilities are very,
very rare. They should not be adopted unless there are
compelling reasons. And even then, retroactivity is
normally quite limited. There is an example in states where
the legislature meets every two years, where when they meet,
they can make the law retroactive to two years ago on the
basis that this is the first chance they've had to do it.
That makes sense. This bill is merely an after the fact
revision and a revised interpretation of the current
assessment deadline statute. Interpretation is an issue
that the Department of Revenue has flip-flopped on since
1978. They told you that their position has been
longstanding and there has been a firm policy since 1984.
I'm going to tell you and show you different. The
Department of Revenue's 1989 interpretation of the three-
year assessment (indiscernible statute issue, and that was
issued in an Exxon formal conference decision, is not
correct. And the Alaska Superior Court has told the
department so, but that 1989 formal conference decision is
the very first time where this interpretation was exposed to
the world by the Department of Revenue. The department's
ability to audit tax returns, you're being told, has been
constrained by its audit resources. That's not true. The
taxpayers have not contributed to the delays in the period
required to issue tax assessments. I'm going to talk in
detail about that. Arguments that substantial public
revenues, this is the $3 billion that are at risk in pending
litigation, in my opinion, cannot be substantiated.
Statements being made by the administration that the
decisions reached by the Superior Court in the Exxon and the
Tesoro case, the Exxon case is on the three-year assessment
statute and the Tesoro case is on the six-year collection
statute -- there are statements that those are inconsistent.
That's not supportable. In fact, the cases are not even
related. Three years is enough time to analyze a taxpayer's
return and determine the taxes due the state. The fact that
the statute of limitations allows for further written
extensions if necessary, does exist. And Exxon has always
granted those requests so I don't see what the problem is.
Someone earlier mentioned jeopardy assessments. That's the
option. Go to the taxpayer, ask for an extension, failure
to give an extension, deny all his deductions. Okay.
You're protected. Put the burden of proof on him at that
point. Let me document these points. As I said, you're
being told to find that this bill is merely a clarification
of a longstanding administrative interpretation that under
the statute for years back to 1976, the Oil & Gas Audit
Division of the Department of Revenue can issue new
assessments or increase existing assessments at any time
while an administrative appeal or judicial appeal, for that
matter, is underway. We believe the division cannot do that
under the existing statute. And we're not alone in our
belief. The Alaska Superior Court has also decided that the
division cannot do that. The state has appealed that
decision. The final decision is expected in the next six
months. The case will be heard next Wednesday and I am
advised that the normal time period is four to eight months
for a decision to be rendered by the Supreme Court. The
court has also advised the parties that it was willing to
take the case on the briefs and waive oral arguments. But
that has not occurred. This is not a clarification of the
law for you to affirm an administrative interpretation an
Alaska court has already found to be inconsistent with the
existing statute. The court has found that the statute is
clear on its face and does not require clarification.
"Furthermore, while the Department of Revenue says their
position is a longstanding interpretation of the statute, I
submit that no such longstanding interpretation or practice
ever existed. Let's look for a minute at the history
surrounding the Department of Revenue's statement on the
statute. The division's original 1978 assessment against
both Standard Oil and Exxon, both of which are dated August
15, 1979, the division stated that the assessments quote
`may change as the result of any audit findings within three
years of the date of this notice of assessment' unquote.
While Exxon and the Alaska Superior Court disagree with even
that statement, that the three years starts from the
assessment date, you should note that those notices did not
say that the assessments may change as the result of any
audit findings at any time during the administrative or
judicial consideration of a taxpayer's grievance. Yet, that
is what is proposed in Section 1 of SB 377. This is a
fundamental abrogation of due process and is not in the
state's best interest.
"The next statement that I am aware of, is one on October
16, 1984, and was referred to by Mr. Hosie, earlier today.
Attorney General Gorsuch issued a formal opinion, addressing
the interpretation of the assessment deadline statute. The
attorney general advised that once the three-year assessment
deadline had expired, an assessment should not be amended
unless the audit staff can show good cause, including an
explanation of why the issue was not addressed by the audit
staff on the original assessment. The Department of Revenue
never accepted that opinion as the definitive and binding
statement of the law; and it said as much in almost those
very words to the Alaska Supreme Court in a 1989 case. The
department's refusal to accept the interpretation of the
Attorney General's Opinion is also shown by the fact that
the interpretation that the department now advocates is at
variance with the 1984 Attorney General's Opinion.
"Let's look at that 89 case. The case I just referred to is
Standard Alaska Production Company and it sued the
Department of Revenue, challenging the department's attempt
to assess additional taxes after the three year period had
expired. The Department of Revenue had also done the same
thing with Exxon and with other taxpayers. Standard asked
the court to declare that the department's interpretation of
the law was illegal. The department told the court, and I
quote `No official department view as to Standard's
limitation claims has yet been formulated.' This is 1989.
Despite the fact that an Attorney General's Opinion had been
rendered on the matter in 84, the department emphatically
argued to the Supreme Court in the 89 case that it had not
yet made up its mind about the correct interpretation of the
statute. And you know, the court relied on that statement
and it sent the question back to the department for
administrative review. It said the case was not right to be
heard by the court until the taxpayer had been through their
administrative procedures within the Department of Revenue.
"Now let's look at what happened in Exxon's 1978 income tax
case because that was cooking along at the same time as the
Standard case. We thought Standard was ahead of us when
they got into the court, it turned out they got thrown out
of the court and now we were ahead of them in the
administrative procedures. In our case, the Department of
Revenue went to the unusual effort of inviting other
taxpayers to submit friends of the court briefs on the
three-year assessment deadline question to help the
department formulate its position as to the proper
interpretation of the statute. If I can hand this out to
folks -- here is a copy of the letter that the Department of
Revenue sent out in 1989. It was sent out on March 25,
excuse me, 1988. On March 25, 1988. And the letter states,
and if you read the bottom paragraph on the first page,
`Your participation is invited in order to assist the
commissioner in focusing on the broader implications of
various possible rulings on the statute of limitations.'
And now we know, in 88, a letter goes out, they weren't
quite sure what ruling they were going to give, and in 1989
they tell the Supreme Court they've not formulated an
opinion. Mr. Hosie says that is a longstanding policy from
at least 1984.
"Finally, on May 26, 1989, the department issued its formal
hearing decision in Exxon's 1978 case, addressing the
assessment deadline issue. This decision in May of 89, is
the department's first solid expression of its current
interpretation of the law, bringing to a close the
uncertainty that it itself had maintained in the Standard
Oil declaratory judgment action. In summary, the department
did not arrive at its longstanding interpretation of the law
until May 26, 1989. And any suggestion the department had
some earlier longstanding interpretation simply cannot be
reconciled with the above facts and those facts are
indisputable. There should be no doubt that this
legislative proposal attempts to completely change the
statute under which taxpayers have conducted their business
for the last 17 years. If anyone has had a longstanding
interpretation and practice with respect to the existing
statute, it is Exxon. The difference between our
interpretation of the statute and the state's is that ours
has been reviewed by the Alaska Superior Court and accepted
while the state's interpretation, first revealed in May of
1989 was reviewed and has been rejected by the court. Judge
Cranston stated in his opinion and I quote, `The court also
finds that in the absence of an exception, the plain and
unambiguous language of both the statute and the regulation
clearly limit the division from issuing initial or amended
tax assessments, later than three years after the return has
been filed by the taxpayer' unquote. There are three
statutory exceptions: 1) Taxpayer fraud, 2) failure to
file, and 3) where both the taxpayer and the department have
signed a written extension. This is not ambiguous. There
are three explicit exceptions. If Mr. Hosie feels there is
a fourth on relation back, let him take that argument to the
Supreme Court next Wednesday. That is the right forum for
this to be decided.
"I told you before and I'll tell you again. Exxon has
granted extensions whenever asked to by the Department of
Revenue. And in several audit years, they were for periods
of up an additional five or six years, giving the department
eight or nine years to complete the audit. All of those
assessments are valid. I am not arguing about those
assessments. Judge Cranston said, `None of these exceptions
apply or exist in the facts of this case.' Next you are
being told that the division's ability to audit returns was
constrained by audit resources throughout the 70s and early
80s and there is just no evidence that that is true. The
public record will show that in every session of the
legislature since North Slope production began, the Oil &
Gas Audit Division, formerly the Division of Petroleum
Revenue, has received virtually every dollar requested in
the Governor's budget request. Adequacy of staffing has
never been an issue. What accounts for the division's
untimely tax assessments is the zeal of its audit staff.
They want to up the assessments, up the ante, on taxpayers
who exercise their rights to appeal assessments. Former
division director, William Floerchinger admitted in a
published interview, four years ago, that the Audit Division
has made a practice to issue highball assessments. One of
the department's own hearing officers told the legislature
in 1986 that the common practice of the auditors is to make
assessments that are very high as compared to the amounts to
which the department later settles with the taxpayers.
Let's face it, the division's standard operating procedure
is to issue amended assessments based on new and ultimately
discredited legal theories to gain leverage for negotiation.
The inadequate staffing levels argument is not valid.
"I think you have been told this week that taxpayers
contributed to the delays in issuing tax assessments because
they requested suspension of actions on assessments. During
the litigation by another taxpayer who challenged the
separate accounting income tax, Exxon did suggest delays
while the court decided the legality of that statute. I
won't lie to you. We did request delays. To me that made a
lot of sense. Why spend money, time, and effort addressing
issues that might be null and void if the underlying
statute, the underlying law, was declared unconstitutional.
Our letters said, we protest the assessment, let's see what
happens on this case, and then let's move forward. If the
law is found unconstitutional, why address assessments under
that law? But even that did not impact the division's
ability to conduct its audits and to make assessments in our
case. I might have asked for a delay, I didn't get it.
Prior to and during the time that the constitutionality of
the separate accounting income tax statute was contested,
the division conducted an extensive audit of Exxon 78
records. In other words, our request for delay was denied.
The 79-81 separate accounting income tax years, the division
also requested and Exxon provided written waivers extending
the assessment deadline. This is an important point, again.
The division had more than six years on average with Exxon
to do the audits because we always gave the extensions. And
for some years, the extensions were up to an additional five
or six years. Additionally, during the pendency of that
lawsuit about the constitutionality of the separate
accounting method, the division issued several amended
assessments, conducted the informal conference with Exxon
under its appeals regulations, and issued its informal
conference decision. So they weren't delayed. The case was
very active while the constitutional litigation was pending.
"Now in the 78 case, Exxon also asked for a delay one other
time, and I'll hope you'll appreciate this one. That one
occurred on the evening before a formal conference was
scheduled, when the Department of Revenue handed Exxon, at
about 4:00 in the afternoon, another revised assessment and
over 200 pages of supporting arguments. This revised
assessment changed the whole theory of their assessment of
the crude value issue for that year. We were scheduled for
formal conference at 9:00 a.m. the next morning. We asked
for a delay in the hearing the next morning to let us read
the material and it was not granted. The hearing went on
the next morning. So, if they are telling you that I've
asked for delays, they're right. Some were very reasonable,
all of them were very reasonable requests. None of them
were complied with.
"You are being told to find that there is substantial public
revenue at risk in pending litigation, which if the state
loses its appeal in the Exxon case, will be contrary to the
public interest since such revenues would be uncollectible.
All I can tell you is that any estimates of dire
consequences to the Alaska treasury, if you vote down this
bill (as I hope you do) are pure speculation. If you don't
vote it down, at least take out Section 1.
"First of all, because of the confidential nature of the
interactions with the department and the taxpayer, I cannot
speak to other taxpayer's assessments that might be impacted
by this bill; I don't know. The fact, though, the division
might try to issue another highball assessment to Exxon or
some other taxpayer today and then tell you tomorrow that
there's even more at stake. In fact, there was an affidavit
submitted one or two years ago by a member of the Department
of Revenue who said there was $600 million dollars at stake.
That $600 million is now $3 billion, and I can't account for
the difference. Neither you nor I can tell if the
assessments would be sustained on their merits, without
knowing the merits of the state's late assessments. No one
can know or even estimate what revenue, if any, might be
lost if the current limitations statutes remained unchanged.
And any estimates are rank speculation.
"Next, you are being told that you need to pass SB 377 to
resolve the alleged inconsistency between decisions reached
by the Superior Courts in the Exxon and Tesoro cases. Now
to suggest that legislation is needed to resolve these
decisions in these two cases is clearly wrong and very
misleading. The two cases involve two entirely different
questions under two different statutes addressing two
different subjects. One is the three-year assessment
statute and the other is the six- year collection statute.
Neither the attorney general nor the department view the
questions addressed in these two cases as related, much less
identical, and the best evidence of that is that although
the state won the Tesoro case in the Superior Court, they
did not even cite it in their briefs in the Exxon case. In
fact, I'd ask you, why are we here? What are we doing here?
The courts have already spoken on both of these statutes.
The state prevailed on its interpretation of the six-year
collection statute and Exxon prevailed on its interpretation
of the three-year assessment statute. The attorney general
has told you that two of every three dollars at stake under
this bill apply to the six-year collection statute. Those
dollars are not at risk. The court has said so. I guess
the real issue is that the attorney general does not want to
let Exxon have its day in court on the three-year statute.
That's what I conclude. The proper forum for this issue is
to be decided in the court. The Alaska Supreme Court will
be hearing the Exxon case next Wednesday. Let them do their
job. Don't change the law to usurp the power of the
judiciary. This controversy over the three-year assessment
statute has been going on for over ten years. We're about
six months from having it finalized. We don't need SB 377,
Section 1.
"Finally, you're being told that three years is not enough
time to analyze a taxpayer's return and determine the tax
due to the state. Proponents of amending the assessment
deadline statute claim that three years is not enough time,
given the allegedly obscure and complex issues involved in
determining the true value of a taxpayer's oil. That
assumption is not substantiated. In fact, it is
contradicted in Exxon's 1978 income tax case, which is to
our knowledge, one of only two cases that the department has
actually adjudicated to a final conclusion on the issue of
crude value. Let's talk a little bit about that case.
"Exxon's 1978 case has been the subject of two formal
conference decisions addressing the value of North Slope Oil
transferred to our own refineries. The second one was
issued over a year ago, on April 9, 1993, and it established
that if the Audit Division complies with the law in doing
its job, the determination of value is not that difficult.
The reason that it's taken nearly 15 years to get to the
bottom of this in Exxon's case is quite simple. The
division tried to ignore the law and Exxon properly and
successfully objected. Let me explain. From the beginning,
Exxon has consistently taken the position that the best way
to value the oil that went to our own refineries was to use
the values that we used when producers sold for cash to
third parties. That was a good bench mark for the oil you
kept. The division refused to accept that approach and
insisted upon substituting hypothetical values for the oil,
based upon its so-called market basket of imported oils.
Most of the time consuming legal skirmishes in Exxon's 1978
income tax case involved the complicated problems
encountered with this approach. Now, after all is said and
done, Commissioner Rexwinkel signed, a year ago, a formal
conference decision saying that the value that Exxon used in
its returns as filed were, in fact, a proper basis for
valuing the oil that Exxon kept for its refineries. What is
more, and this is the supreme irony of the fourteen year
legal battle on the 1978 case, is that when the department's
methodology is properly applied, as the commissioner ruled,
Exxon actually overvalued its oil. That's right. We paid
more taxes on the crude value issue with our 78 return as
originally filed, than the commissioner said we should have.
Commissioner Rexwinkel's April 9, 1993, decision in Exxon's
tax case further confirmed that Exxon had a right to rely
upon the department's published formal hearing decision in
the 1983 Amerada-Hess case regarding the use of North
Slope's sales data in determining the imputed value of the
oil that Exxon kept for its own refinery. In the opinion,
the commissioner criticized the Oil & Gas Audit Division for
refusing to comply with that decision. He said that he
found it `disconcerting' that the division would attempt to
ignore the Amerada-Hess methodology which Exxon dutifully
used. He also criticized the division's expert witness for
refusing to follow the analysis of the Alaska Supreme Court
by repudiating the market value concept that is the core
principle of the tax law.
"In short, there is one simple explanation for why the 78
tax case has taken so long to resolve. The Oil & Gas Audit
Division simply ignored the law in the Amerada-Hess case.
If it had done what Commissioner Rexwinkel said it should
have done and followed its own regulations as it was
interpreted in the 83 case, the 14-year battle would never
have occurred. Taxpayers should not be punished for the
division's having ignored the rulings and regulations of its
own commission. Yet to this day, that formal conference
decision which was remanded to the Oil & Gas Audit Division
for a final tax computation consistent with the opinion, has
not been seen or heard from again. Ask the commissioner
where it is. Who is delaying here?
"In closing let me spend a few minutes talking about some of
the effects of this bill on the state and its taxpayers.
Even if Exxon did not have existing disputes with the state
of Alaska, I would still be here telling you that passing
this bill would be bad law. Bad for the administration of
the tax laws of the state of Alaska and bad for taxpayers.
It would be bad because it's likely going to increase an
already overburdensome litigation situation on tax issues
here in Alaska, since taxpayers will be required to defend
against some entirely new and perhaps misdirected
interpretation embodied in an assessment that today could be
received fifteen or twenty or more years after the fact.
That's wrong. We urge you to pass laws that will seek to
resolve tax conflicts for both Alaska and the taxpayers. SB
377 does what no other state has ever done. It changes the
rules 18 years after the fact. This bill calls for
retroactive changes to 1976. That's wrong. That's
offensive. And that's interfering with the decision of an
Alaska court. That court said what the plain legal meaning
of the current legislative language is. That decision does
not square with what the division would like it to say, so
now you have this bill to undermine that decision. That's
wrong. That's interference with a valid court decision
applying the laws adopted in previous sessions of the Alaska
Legislature and signed by the then governor. Retroactive
changes to a state's laws sends a bad signal to all business
in general about the stability and the certainty of the
business climate in the state. It will impact on business
decisions in the future. This administration has held
discussions with producers concerning what's needed for a
commercially viable gas line. What you do with this bill
will certainly be a factor in at least one company's
internal valuation of such a project. A taxpayer is entitled
to a final resolution of his or her tax liabilities in a
reasonable period of time. That is not happening under the
current law. But the gridlock is not caused by the current
law. It is caused by the Oil & Gas Audit Division and the
Department of Revenue, issuing assessments that are totally
inconsistent with the plain meaning of the tax law. Don't
change the law, change the practice. As the hearing
examiner said in his opinion on our 78 case, which was
adopted by the commissioner on April 9th of last year, quote
`The division's position of not using available market data
whether for ANS or other transactions which are evidence of
the value of ANS in the market is disconcerting.' I agree.
If this bill becomes law, we will have more issues like
this, not fewer. We will have longer periods before
resolution, not shorter. We will both have to utilize more
of our manpower and financial resources resolving these
assessments, not less. As I've said before, and I'll say it
again, that is not right. Don't promote tax gridlock in
this state. Take a step to end it. Reject Section 1 of SB
377. Thank you for the time you have taken with me. I'm
prepared to respond to any questions that you might have."
CHAIRMAN VEZEY: "Thank you Mr. Sullivan. I would like to
ask you to elaborate just briefly if you would. You have
expressed your opposition to the whole bill, to Section 1
specifically. I didn't hear you comment on Section 1,
paragraph (a) (2)."
MR. SULLIVAN: "Section 1, paragraph (a) (2) - that's the
prospective?"
CHAIRMAN VEZEY: "Yes."
MR. SULLIVAN: "Well, I guess I'd have a couple of comments
there. One was mentioned this morning, I believe, on page
2, line 4, it talks about the department may not increase an
assessment under this subsection. I believe it's left open
the question about issuing a new assessment. And that's
something that should be clarified prospectively. Let me
also point out, as I have in my testimony, that conceptually
nothing has changed about the ability of the taxpayer and
the state to enter into written agreements to extend the
five year statute. You could extend the three. The
extension is still in the law, even with this change. So
the five years is not five years certain. It means at the
end of five years you either give the Department of Revenue
an extension or get a jeopardy assessment. If they're not
done."
Number 688
CHAIRMAN VEZEY: "Thank you. You didn't specifically
comment on Section 3, the prevailing value for oil. I guess
you did."
MR. SULLIVAN: "Well let me comment on it this way. You
can't sugarcoat a bad bill and make it a good bill. Section
1 is a bad bill. Any bill that includes ...." (tape ends)
TAPE 94-63, SIDE A
Number 000
MR. SULLIVAN: "...whether any change needs to be made.
That's the way it is in royalty. That there's an agreement,
there's a reopener, a sit down session, agreement or
baseball arbitration, and prospective application of any
change. This one looks like it's retroactive. And I'm
already opposed to retroactivity."
CHAIRMAN VEZEY: "Thank you. Are there further questions
from the committee? Representative Brice."
Number 016
REPRESENTATIVE BRICE: "Thank you, Mr. Chair. Quick
question. Why haven't (indiscernible) forced the issue and
gone ahead and asked for the formal conference up-front,
just to get the thing out of the way?"
MR. SULLIVAN: "Very good question. Let me give you a
hypothetical in response, and see if you'll agree with me.
Let's say you go to your house tonight and there's a letter
from the IRS and it says `We just looked at your tax return
and you owe $100,000 of additional taxes beyond what you
paid.' You've got a couple of choices, there's a phone
number to call or now that you've got this, you've got the
right to run right to court. I think you'd pick up the
phone, you'd call and try to find out what it's about and
then you'd try to meet with an IRS agent, and try to settle
it out - maybe it's just a big mistake. The system in
Alaska, that maybe the commissioner will explain to you
later, but it starts out with the return and the audit and
the assessment. And then you're right - the taxpayer has a
choice - he can go informal conference or formal conference.
The formal conference is very, very much like a trial. The
state hires counsels, outside counsels, and experts. The
company hires outside counsels and experts. There's
discovery, there are depositions that are taken, and it is
that record from the formal conference, that goes up to the
Superior Court on appeal. You don't get a new trial on the
facts. What we try to do when we get the assessment, is go
to informal conference and point out there's a math error;
we think you've misunderstood the documents that we gave you
that led you to issue this portion of the assessment. We
might provide - we figure out that they don't understand
something, and you put the same information you've given
them, you explain it to them again. Many of these issues go
away at the informal conference. Having finished resolving
everything that you can, and a lot of time, that's a lot of
it, you then focus on the issues where there's a true legal
conflict between you and the state on the interpretation of
the statute. That's what you take to formal conference. It
makes sense. That's what we do."
Number 067
CHAIRMAN VEZEY: "And the tribunal or the adjudicating
counsel at the formal conference is?"
Number 069
MR. SULLIVAN: "The hearing officer appointed by the
Commissioner of Revenue, who happens to work for the
Commissioner of Revenue, and then the taxpayer and the state
-the DOR's counsel, which would be the Attorney General's
Office, those lawyers present their cases to the hearing
officer. He renders a formal conference decision, and if
the formal conference decision is in favor of the taxpayer,
it is fixed and final - not appealable by the state.
Because basically, the Department of Revenue is saying that
the Department of Revenue was wrong. But the taxpayer may
appeal it if it's adverse to the taxpayer. But the record
from the formal conference is what is brought up to the
Superior Court."
CHAIRMAN VEZEY: "So this formal appeal process is not in
accordance with the Uniform Arbitration Act or the rules of
the American Arbitration Association?"
(The response was inaudible).
CHAIRMAN VEZEY: "Further questions from the committee?
Representative Porter."
Number 092
REPRESENTATIVE PORTER: "Thank you, Mr. Chairman. Would you
agree, generally disagree or something in between on the
quid pro quo between the dollar cap on processing for gas
and the definition of (indiscernible.)"
Number 098
MR. SULLIVAN: "Let's look at that. Mr. Hosie made a
comment. His comment was, as I recall, that this was a
compromise, that the dollar a barrel - the state says that
the number is more like 56 cents, the companies say it's
three to four dollars. And then we have language that says
that it may not exceed a dollar. Now I read that as saying
it might be 56 cents. But it can't be three or four
dollars, so I don't see this compromise here. May not
exceed a dollar includes 56 cents, but it doesn't include
two, three, four dollars. I see absolutely no compromise
and absolutely no value."
Number 116
CHAIRMAN VEZEY: "Representative Brice."
Number 117
REPRESENTATIVE BRICE: "Thank you, Mr. Chair. At the start
of your testimony, we'd had a brief discussion about the
idea of the relation back theory. Could you explain again
why you don't think that it's an applicable doctrine in this
case."
Number 123
MR. SULLIVAN: "You're asking me to give Exxon's side of the
Supreme Court case that's going to be heard next Wednesday.
I will provide you with the briefs, if you would like them.
We have outside counsel handling that. We disagree with the
state's interpretation of the relation back theory. The
Superior Court disagreed with the state's relation back
theory. But I think it's about the only thing that the
attorney general has to argue before the Supreme Court. Mr.
Hosie said they are very confident about their position. I
would submit that it would very appropriate for you to allow
them to bring their position before the court. If you pass
this bill, that will not happen because this bill takes away
all of my rights to be heard in the Supreme Court. I have
no rights, once you pass Sections 16 and 17, declaring that
Section 1 - stating that Section 1, is declaratory of what
the law was, and Section 17 saying that it is applicable to
cases pending before the courts. I'm out of there. The
attorney general will go up and hand them SB 377 and say
that there is nothing for you to decide and that is not
right."
CHAIRMAN VEZEY: "Is that all, Representative Porter?
REPRESENTATIVE PORTER: "Yes, thank you."
CHAIRMAN VEZEY: "Representative Ulmer."
Number 154
REPRESENTATIVE ULMER: "Thank you, Mr. Chairman. Well, on
that point, you said earlier that the day in court
controversy, it's kind of an interesting way to frame the
question. I mean you're saying that you're being deprived
of your day in court by this legislation because it, in
essence, says that the state may continue to have its day in
court on the merits of the assessments and the collection
issues. So, one's a process point, the other is a substance
point. And I think it's something we ought to clarify for
the committee. If the statute is not adopted, a timing
question, a process issue, precludes the state from having
its day in court in terms of the merits or the substance or
the validity of the assessments. And your day in court is
limited strictly to an interpretation of a procedural limit
on the ability to actually get at the merits of the case.
So, they're not exactly equal and I think that that's what
we're trying to struggle with here as we strike a fair
balance between the industry and the state. You know, I
don't think anyone sitting around this table, likes the idea
of retroactivity; although, I think in fairness to you, you
should know that this legislature as already adopted a
statute this session that retroactivity precludes private
nuisance lawsuits, for example. I mean, we're quite willing
to do that, unfortunately. But, I think the question here
is a procedural point. We're not changing the rules, so to
speak, in terms of what taxes are owed. We're changing the
rules just in terms of how much time you get to debate over
what the taxes are owed. So, I don't know, I'd appreciate
your comment on that, but you can't blame the state for
trying to bring some certainty and guarantee that it will
have an opportunity in court to collect the taxes."
Number 192
MR. SULLIVAN: "Mr. Chairman, let me give three points in
response to that. The first is, if I'm not incorrect, the
private nuisance lawsuit issue - the attorney general came
before a committee reviewing that bill and argued that
because of the retroactivity, it was not the correct thing
to do because it was probably unconstitutional. I think I'm
right -we may have to check. Second, I will agree that a
procedural change within the year, is just that. But a
change which goes retroactive 18 years is the equivalent of
changing the underlying law, because 18 years after the
fact, many of the people who worked on issues that might be
raised tomorrow if you pass this bill today, are no longer
with Exxon Corporation. Many have retired, some may have
passed away. Records on issues, that I haven't got the
foggiest idea what they might be, have been moved several
times in relocations, et cetera. So, it's not procedural.
It is going to the heart of the matter. I think those are
the points I'd like to make."
Number 218
REPRESENTATIVE ULMER: "It may go to the heart of the matter
in the sense of the evidence and the freshness of the
material that needs to be presented in deciding it, but it
doesn't go to the question of whether or not a fundamental
right to sue, a cause of action, is being altered. And I
guess that's the distinction, isn't it, between the private
nuisance example and this example. It goes to the question
of whether or not the right that an individual has to sue,
based on the merits of that case versus the rights simply on
the timeliness or the freshness or the staleness of the
evidence."
Number 228
MR. SULLIVAN: "There is a fundamental right which is being
abrogated by this legislation. That is the right to rely on
the laws. The law is what the law is, and the Superior
Court has stated what the law meant. And we had a right to
rely on that law. Passing this legislation, if it were done
today, I might get another assessment tomorrow. I did get
assessments that came eight or ten years after the year to
which they related. I was in trouble to begin with on
those, because of the books and records, and corporate
memory, and people who had retired and didn't remember the
transaction and it was not fresh - it was stale. That's why
you have statute of limitations, so that I know where there
may be differences of opinion between Exxon Corporation and
any state or federal or foreign government, and I can gather
the records while they're still fresh, I can gather the
people while they're still fresh, and I can defend myself.
This doesn't allow me to do that. This type of legislation
does not allow that."
Number 248
REPRESENTATIVE ULMER: "Back to Representative Brice's point
though, if that was a real concern to Exxon, it seems to me
that you would have gone to the formal hearing process, the
formal adjudication, to bring closure when you had a higher
degree of certainty about what the evidence would be. And,
I'm not sure whether in your response, you were suggesting
that you don't feel as though there's due process
associating with the hearing officer procedure in the
Department of Revenue. I don't know whether you're
suggesting that or not."
Number 257
MR. SULLIVAN: "There are some concerns in that area. They
are unrelated to this bill and what's before us today. We
received a total of, if I remember correctly, eight
assessments with respect to our 1978 year. We started out
with timely assessments, where we would analyze them,
protest them, analyze, and then get another one, analyze it,
protest it, analyze it, protest it. And then we got ones
that were untimely, where we analyzed and protested and
included in the protest that this was not a valid assessment
because the statute of limitations had run. In the
administrative process within the Department of Revenue, we
agreed to accelerate the question on the statute of
limitations by what's called bifurcating the case. It was
timely assessments issued with respect to ROI that you've
heard about in ANS crude value, and we said, `Okay, we're
going to put these over here and work them, but we're going
to accelerate this question on the statute of limitations,
because it is at the heart of getting the year closed.' So
that was taken through informal and formal on an accelerated
basis. We did try to accelerate the issue. That still
meant we didn't get an answer out of the formal conference
until May of 1989. We immediately went to the Superior
Court. There was about a two year period before a decision
in, I think, in 1992. And then the state appealed it."
REPRESENTATIVE ULMER: "Were due process issues raised in
that litigation?"
MR. SULLIVAN: "I believe they may have been."
REPRESENTATIVE ULMER: "Okay, because I know in some
proceeding, I wasn't sure whether it was yours, that the due
process claim had been raised and that the court had ruled
that there were no violations of due process in the hearing
officer procedure. And that, as a matter of fact, a number
of them had been decided against the state which re-enforced
the state's determination (indiscernible) that there wasn't
a due process problem. Thank you, Mr. Chairman."
CHAIRMAN VEZEY: "Thank you. Representative Davies."
REPRESENTATIVE DAVIES: "Thank you. The attorney general,
also indicated the third method - second method, I guess,
for stopping the clock which was to pay the assessment and
then file a claim for a refund. Would you comment on your
view of that process."
MR. SULLIVAN: "...assessments were any where near the
taxpayer's internal analysis of the ultimate liability, that
would probably occur. However, where they are significantly
inflated, I don't know about other corporations, but we
don't have the money to put on deposit with a lot of states,
awaiting the process to get it back. I'll give you an
example in the federal arena. Exxon was presented with an
assessment from the federal government that incorporated an
issue involving the value of Saudi crude. Many of you may
have heard of the Saudi Pricing case. In any event, the
assessment was multiple billions of dollars. We chose, in
that instance, to go to the tax court - to get to the tax
court all you do is file a petition - if you want to go to
the court of claims, you have to pay the tax and sue for a
refund. You have an alternative system, of going to the tax
court. We went to the tax court because we did not owe
those dollars, and they were so substantial that we weren't
going to pay them. We had a recent decision in our favor on
the Saudi Pricing case. That was a multi-billion dollar
case. In the state arena, same thing. If the tax is
somewhere near the liability, then you'll seriously look at
the opinion of paying and going for refunds. Where there
are huge differences between your analysis (indiscernible)
and assessment, it's going (indiscernible)."
REPRESENTATIVE DAVIES: "A follow-up on that specific point.
When a company in its financial (indiscernible) claims that
it has sufficient reserves to meet its potential liabilities
in these court cases, when you make those statements, do you
take into account your assessment of the risk of you losing
those assessments?"
Number 328
MR. SULLIVAN: "Many, many companies do them many, many
different ways. A lot of companies, who have been around
for a long time, might just have a (indiscernible)
statistical average of what's happened over time
(indiscernible). I can't speak for industry or for business
in general."
Number 333
REPRESENTATIVE DAVIES: "So, I guess what you're saying then
-you said there's a cash flow problem with doing that, so it
must mean that there isn't actually a bank account somewhere
that has the amount in it (indiscernible) the total
liability that you might be exposed to. Is that correct?"
Number 337
MR. SULLIVAN: "That is a correct statement. There is not."
Number 338
REPRESENTATIVE DAVIES: "Thank you. And then the last
question I had has to do with Section 18 and I wondered if,
apart from the fact that there is a Section 1 in this bill,
could you comment on Section 18."
Number 341
MR. SULLIVAN: "That's the NGL's. And as I think I told you
and we've had prior testimony from the attorney general that
said that the state's position on NGL's is quote `unique'
unquote. Every other state treats them as gas, so whatever
effective date you want in there. All this does is, it
gives certainty, I will agree with that, it gives certainty.
It certainly says that the state of Alaska is no longer
unique. It's like the rest of the states. It's treating
natural gas liquids as gas, but if that's a compromise, the
only thing it's doing is removing litigation, wherein we
would show that natural gas liquids are gas."
CHAIRMAN VEZEY: "Thank you. Representative Nordlund."
REPRESENTATIVE NORDLUND: "Thank you, Mr. Chairman. Mr.
Sullivan, you mentioned that there, or admitted basically,
that there are certain sections of this bill that would help
lead to lessen the amount of litigation in the future, but
you said that Section 1 was going to lead to additional
litigation."
MR. SULLIVAN: "I suspect."
REPRESENTATIVE NORDLUND: "And I know of at least one case
that you won't need to litigate if that section passes, but
what further litigation are you talking about. I didn't
follow that. I wonder if you could comment on that."
MR. SULLIVAN: "Well, I suspect that serious consideration
would be given by one or more companies, to challenge the
constitutionality of SB 377, if passed (indiscernible)
Section 1, to the constitutionality of a retroactive change
in the law for 18 years."
CHAIRMAN VEZEY: "Representative Hudson."
MR. SULLIVAN: "There may also, excuse me, Mr. Chairman, may
be litigation in terms of a particular 78 case as to whether
we have a property right in a decision of the Superior
Court, in support of the constitutional challenge."
Number 371
CHAIRMAN VEZEY: "Representative Hudson."
REPRESENTATIVE HUDSON: "Thank you. Mr. Sullivan, in
layman's language, what is, as simply stated, the principal
question before the court. You've indicated that if this
bill passes, it takes away your rights to proceed in the
courts. Maybe you could just help, me at any rate, if you
could tell me, what is that question."
Number 376
MR. SULLIVAN: "The question before the court is
essentially, did the Superior Court - is the decision of the
Superior Court correct? And the decision of the Superior
Court was that this statute - the assessment statute - was
plain and unambiguous on its face, and not subject to any
other interpretation. That it specifically, the statute and
the regs, had three enumerated exceptions: Fraud, failure
to file, or a joint agreement between the taxpayer and the
Department of Revenue to extend the statute. And that under
those circumstances, three years means what it means. That
there is three years from the date the return is filed for
the Department of Revenue to audit and issue an assessment.
And that any assessment that came after that period, is
invalid. So, it's an appeal by the attorney general from a
decision, which he disagrees with, to see if the Supreme
Court will agree with him."
CHAIRMAN VEZEY: "Mr. Sullivan, do you have an idea of how
many - what the total number of assessments that the state
of Alaska has against Exxon right now, in terms of oil
property tax or severance tax?"
MR. SULLIVAN: "The number of outstanding assessments?"
CHAIRMAN VEZEY: "Yes."
MR. SULLIVAN: "We have received assessments for the 78 to
81 income tax, we closed through 78 production, assessments
for 79 through 89, and for the modified apportionment income
tax 82 through 87, but that does not mean that there is one
assessment per year. I use the example of 1978, wherein we
received eight separate assessments with respect to that one
income tax year. Four or five of those were timely and
three or four, I can't remember, were after the statute had
run, according to Exxon and according to the Superior Court.
Let's go back again and make the point. There are two
Superior Court decisions. One of them is on the six-year
collection statute and it holds that the state's
interpretation that the statute stops for the period of the
administrative appeals in terms of final determination of
liability, that the state is right. There is another one
that says that three years means what it says and you can
assess within the three years or any extension thereof
mutually agreed in writing. And after that, any subsequent
assessment is untimely. Both of these statutes that you're
being asked to change have been to the court and decisions
have been rendered. And based on the attorney general's
split that two-thirds of the dollars are in the collection
statute and one-third is in the assessment statute, I guess
another way of looking at it is, the state won two-thirds
and the taxpayer won one-third, right?"
CHAIRMAN VEZEY: "Representative Ulmer."
REPRESENTATIVE ULMER: "Thank you, Mr. Chairman. Just one
last question. When you first began, you mentioned that
this provision may not be different from other states, but
what is different is that in other states, the legislature
did not go back later and declare it to be the law. That
that is the way it's been in other states and there just
wasn't an issue about how it was to be applied. Now, in
this case, the industry is representing this as
retroactively changing the rules of the game. The state is
representing it as, in essence, blessing past practices.
Basically, a statement on the part of the legislature that
the legislation means what the state says it means, as
opposed to what the industry says it means. The state is
basically - the attorney general has come to us and said,
this is what we think it means. You have indicated that if
this was a longstanding policy, there is some evidence of
the record, why it was not a longstanding policy, in terms
of the Department of Revenue saying that they haven't made
up their mind what their official policy is, but that's
different than saying that that's what the attorney
general's ruling is that that's what the law has always been
in Alaska until the Superior Court came along and said that
isn't what the three-year assessment statute means. The
Superior Court all of a sudden says it means something else.
The attorney general says the Superior Court is wrong - it's
always meant this, not that, and they're going to court,
you're going to court, to get the Supreme Court to say, it
means what the attorney general says, it doesn't mean what
the Superior Court judge said it means. That's where we
really are. And, I guess, what's very confusing to
legislators, when the framing of the issue is retroactively
changing the rules of the game. It's that just somehow that
the tax laws are being changed, which, of course, they're
not."
CHAIRMAN VEZEY: "Representative Ulmer, could you please
lead into a question somewhere?"
REPRESENTATIVE ULMER: "Thank you, Mr. Chairman, I'm trying
-I'm trying, honestly. The framing of the issue as
retroactively changing the rules of the tax law; that's what
I'd like you to speak to at this point, if you would,
because I see it as declaration of the law in a way that you
do not like and the attorney general does like. How is that
consistent with your describing it as changing the rules by
which the taxes are calculated in the state of Alaska?"
MR. SULLIVAN: "Well, let's take an example. I got my first
assessment on 78 and in that assessment it says `this
assessment may change within a period of three years from
the date of this assessment.' Let's suppose that three
years and one day later, now knowing the issues in the
assessment for which I have to keep corporate records
because they're in the assessment and these are issues that
are going to be talked about, and throw everything else
away. Now in 1984, lo and behold, there's an Attorney
General's Opinion that says, `With the showing of good
cause, an assessment may be changed, but the Department of
Revenue must show the reasons why they didn't originally put
it in an earlier assessment.' Now I'm out in the garbage
can and I'm trying to find those records. And then I get a
letter in 19880 - well, then I see, Standard says the
Department of Revenue says in the Standard Case that we have
no position - now I'm looking for all the darn records. And
then I get a letter from the Department of Revenue that
says, `We want you and others to file friends of the court
briefs.' And that letter, by the way, went to 30 or more
companies. Remember the first thing I did in my
hypothetical - I threw out the records, because I had an
indication that the Department of Revenue knew what the rule
was. I didn't even agree with that rule, that said three
years from the date of the assessment, because I read the
law and it said, `three years from the date the return was
filed.' That's the difference. Now you go a year back and
it's okay, as far as I'm concerned, to differentiate
between, for example, changing the tax rate in 1978 from
whatever it was then to something higher. We all agree
(indiscernible). Change in administrative procedures
surrounding a law back to the first of the year, maybe back
to the year before, it's not going to be too big of a
problem. But when you go back 18 years, I have difficulty
differentiating between the heart of the law and the rules
around the law. Boom - they are the same, because you're
going back so far. Each affects the other and they're
indistinguishable. That's my position."
CHAIRMAN VEZEY: "Representative John Davies."
Number 491
REPRESENTATIVE DAVIES: "Thank you. On that point, it seems
to me that in every one of these cases, the state has filed
an assessment within the three year period. Isn't that
correct?"
MR. SULLIVAN: "Yes."
REPRESENTATIVE DAVIES: "And in the case that you're talking
about, of say three years and one day after that assessment
was filed, you throw away your records. But at that point
in time, aren't you still in dispute with the state."
MR. SULLIVAN: "On an identified portfolio of issues. Those
included in the assessment that I received."
Number 500
REPRESENTATIVE DAVIES: "But I mean the - you're still in
dispute on those back taxes."
MR. SULLIVAN: "On the issues in the assessment that I have
received. That is correct."
REPRESENTATIVE DAVIES: "I guess that I'm having trouble
understanding why if there is still a dispute going on, why
you would throw any records away."
MR. SULLIVAN: "Because I've narrowed down the area of
dispute between the state or federal government or whatever,
and myself. I know what records I have to keep because I
have been told what issues exist when they gave me the
assessment. By giving me the assessment, they also told me
what issues didn't exist. And those are the ones that
weren't in the assessment. But, lo and behold 10 years
later, the issues that didn't exist, pop up in an
assessment, which I say is untimely."
Number 511
REPRESENTATIVE DAVIES: "I guess if the IRS sent me an audit
of my 1985 tax records, I wouldn't throw anything away that
said 1985 on it."
MR. SULLIVAN: "If they didn't say they were going to audit
your 85, the IRS sent you a notice saying, `In your 1985
return, we want you to provide additional information with
respect to interest deductions. You provide information.
And then you get an assessment, and then the federal statute
runs, and you throw out all of your documentation on
charitable contributions, because you know the issue you
have with the IRS is on interest expense deductions. And
now, five years later, they come back and issue you another
assessment and ask about your charitable contributions, and
you say `Wait a minute, I threw all my records out.' That's
what we're talking about. Known and unknown."
Number 523
REPRESENTATIVE DAVIES: "How long does Exxon usually keep
these kind of records around? Is there a general rule of
thumb or is it just whatever?"
Number 527
MR. SULLIVAN: "There is a records retention and review
procedures, and I'm using a hypothetical here in terms of
just trying to show how 18 years retroactive is impacted by
many, many things. It's impacted by records, it's impacted
by corporate memory, I mean, people who were there when the
transactions - even sometimes, you can find the people and
they go `Ya, I remember that.' If I had an assessment in
three years, they'd say `I remember that!'"
REPRESENTATIVE DAVIES: "But there isn't any general policy
about how long you keep stuff, is there? It just depends on
what kind of a document it is."
MR. SULLIVAN: "Don't throw things out before the statute of
limitations runs."
REPRESENTATIVE DAVIES: "Or agreement (indiscernible.)"
MR. SULLIVAN: "Probably you don't throw things out before a
statute of limitations that has been looked at by a court
runs."
CHAIRMAN VEZEY: "Mr. Sullivan, on that point, I mean, would
you just kind of - could you give us an idea of the volume
of records that Exxon Corporation stores or how many square
feet of warehouse that you store your records in."
MR. SULLIVAN: "I wouldn't have the foggiest idea."
CHAIRMAN VEZEY: "We're talking entire warehouse fulls."
MR. SULLIVAN: "A lot, and that's about as close as I could
come."
CHAIRMAN VEZEY: "I'm sorry, Representative Davidson, I
believe was (indiscernible)."
Number 542
REPRESENTATIVE DAVIDSON: "Well, thank you, Mr. Chairman.
Mr. Sullivan, you've given us a very tightly crafted
statement here, it seems, but and it was a little too fast
for a slow person like me, but it seems, you have indicated
that - let me pass for a moment, Mr. Chairman. Well, let me
ask you this. Given the limitations factor, is it not in
your interest to grant all of the requests by the state to
extend your dispute?"
Number 554
MR. SULLIVAN: "Mr. Chairman, I indicated earlier that on
every occasion that Exxon has been requested by the state to
grant an extension, we have done so. Now let me mention
there's one where it didn't work. Year-end 1993, the
Department of Revenue - it was about mid-December, the
statute of limitations for the production tax years 87, 88
and 89 were going to expire at year-end 93, and I got a
call, it was in December, and was advised by the state - or
Exxon got a call, I don't think I got it directly - that
they needed a little more time to properly complete the
transportation portion of the assessment. And they asked if
Exxon would extend the statute of limitations another time;
we had already extended it once or twice before. And when
the fellow in my department who got the call asked me I
said, `Well, the problem that the division has is with
respect to the transportation portion of the assessment and
I will agree to give them an extension limited to the
transportation portion of the assessment, that I'm going to
receive.' Now they said that's where their problem was, I
do want to speed up the process, they told me everything
else was ready, I said, `Then I'll give you a limited
extension for the area that you tell me you need it for.'
They said, `No' and issued the assessment on December 31. I
guess that's the only time I've played hardball with them,
which was simply saying, `I'll extend for the reason you
told me you need the extension.' Every other time, it's
just been a blanket extension."
REPRESENTATIVE DAVIDSON: "Mr. Chairman, I have just one
other question, if I may. You've characterized this piece
of legislation as something that you just cannot live with.
But it is my understanding that it was your company that was
involved in crafting negotiated law to go forward with this
legislation."
MR. SULLIVAN: "That is not so. I believe I came up here a
week ago Wednesday, when I was advised that there was going
to be a meeting between industry and Department of Revenue
and Department of Law to work on a potential bill on some of
these issues that are outside of Section 1. And I came here
to do that, and the landscape quickly changed. I saw these
bills, and I've been consistent in my opposition to this
since then."
REPRESENTATIVE DAVIDSON: "So if this bill goes forward, did
I understand you correctly to say that, you still have to go
forward with the case before the Supreme Court, right?"
MR. SULLIVAN: "No, if this bill is passed, what the
legislature has done is pulled the rug out from any
opportunity for me to have my day in court. Section 16 in
this bill says that it is declaratory of existing law as
originally enacted and Section 17 says that it applies to an
action or appeal pending before a court on the effective
date. The import of those two sections if this bill passes,
is to take away my right - my day in court - to defend the
Superior Court decision that was rendered in my favor.
Because the law that is before the court is the three-year
statute and this changes that statute. So I have nothing to
argue, because the legislature will have taken away what I
am in the Supreme Court attempting to finalize. Something
that we have been consistent in our interpretation of the
statute from the very first assessment that came three years
after a return was filed. And we've been consistent in that
position for over 10 years and we are now six months - well,
we're five days from an oral argument and probably four to
eight months from a decision. This legislative body may
take the opportunity for a final resolution of that question
away. That's what happens when you pass this bill."
CHAIRMAN VEZEY: "Further questions from the committee?
Representative Hudson."
REPRESENTATIVE HUDSON: "One more. Mr. Sullivan, if the
court case that's in process right now, proceeded as
scheduled and the lower court's position is upheld, does the
state risk the loss of all assessments made within the three
year limit or are only the increased assessments that were
introduced after the three year limit at risk?"
MR. SULLIVAN: "I can only speak to Exxon's case and I will
remind you that on average, the state has had five or six
years for each tax period, to audit Exxon because we have
entered into a voluntary written agreement with the state to
extend the statute. I assure you, any assessment that was
issued during the first three years or any extension to the
three years that Exxon has received, is not at risk at all.
Those are valid assessments. I also am telling you that in
Exxon's opinion, the Superior Court decision in the Tesoro
case - in the Tesoro case, on the six-year collection
statute is the law and says that the $2 billion that the
attorney general told you is quote `at risk under the
assessment statute' is not at risk. Because there is a
court decision that says the attorney general is correct.
If it's taxpayer to taxpayer on what the valid assessments
are, I've got years worth of valid assessment
(indiscernible) eight years after I filed the return and
that's because I agreed with the Department of Revenue to
extend."
REPRESENTATIVE HUDSON: "Without figures, Mr. Sullivan, what
percentage of the total difference between the state's claim
and the company's view is protected within the three years
or the agreed upon extensions. What percentage is outside
of that? Just a percentage, roughly speaking."
Number 642
MR. SULLIVAN: "You're talking Exxon, specific?"
REPRESENTATIVE HUDSON: "Yes, sir."
MR. SULLIVAN: "I'm not going to be specific simply because
of the audience, but I will tell you that as a percentage of
the total assessment, it's not (inaudible)."
REPRESENTATIVE HUDSON: "But the total, the percentage that
is within the fair game..."
MR. SULLIVAN: "Oh, the fair game portion. I'm sorry
(indiscernible.) The percentage of timely assessments is
very large."
REPRESENTATIVE HUDSON: "So then, at risk is the smaller of
the percentage."
MR. SULLIVAN: "That's right. I'm sorry, I confused
(indiscernible.)"
CHAIRMAN VEZEY: "Further questions from the committee?
Seeing none, we'll stand adjourned until 9:00 a.m. tomorrow
morning."
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