Legislature(2003 - 2004)
05/08/2003 07:08 AM House W&M
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
May 8, 2003
7:08 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Jim Whitaker, Co-Chair
Representative Cheryll Heinze
Representative Vic Kohring
Representative Bruce Weyhrauch
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Norman Rokeberg
OTHER LEGISLATORS PRESENT
Representative Dan Ogg
Representative Paul Seaton
Representative Sharon Cissna
Representative Les Gara
COMMITTEE CALENDAR
HOUSE BILL NO. 298
"An Act relating to the distribution of appropriations from the
Alaska permanent fund under art. IX, sec. 15(b), Constitution
of the State of Alaska, and making conforming amendments; and
providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 293
"An Act levying and collecting a state sales and use tax; and
providing for an effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 298
SHORT TITLE:DISTRIBUTIONS OF APPROPS FROM PERM FUND
SPONSOR(S): WAYS & MEANS
Jrn-Date Jrn-Page Action
05/05/03 1318 (H) READ THE FIRST TIME -
REFERRALS
05/05/03 1318 (H) W&M, FIN
05/05/03 1318 (H) REFERRED TO WAYS & MEANS
05/06/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
05/06/03 (H) Heard & Held
MINUTE(W&M)
05/08/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
BILL: HB 293
SHORT TITLE:STATE SALES AND USE TAX
SPONSOR(S): WAYS & MEANS
Jrn-Date Jrn-Page Action
04/30/03 1202 (H) READ THE FIRST TIME -
REFERRALS
04/30/03 1202 (H) W&M, FIN
05/01/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
05/01/03 (H) Heard & Held --
Teleconference --
MINUTE(W&M)
05/06/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
05/06/03 (H) Heard & Held
MINUTE(W&M)
05/07/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
05/07/03 (H) Heard & Held -- Recessed to a
call of the chair --
MINUTE(W&M)
05/08/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
WITNESS REGISTER
ROBERT BARTHOLOMEW, Chief Operating Officer
Alaska Permanent Fund Corporation
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Testified on HB 298.
LARRY PERSILY, Deputy Commissioner
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Testified on HB 298 and HB 293.
RON LORENSEN, Attorney
Simpson, Tillinghast, Sorensen, and Longenbaugh
Juneau, Alaska
POSITION STATEMENT: Testified as outside counsel to the Alaska
Permanent Fund Corporation on HB 298.
TAMARA COOK, Director
Legislative Legal and Research Services
Legislative Affairs Agency
Juneau, Alaska
POSITION STATEMENT: Testified on HB 298.
ROBYNN WILSON, Revenue Auditor
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions on HB 293.
ACTION NARRATIVE
TAPE 03-24, SIDE A
Number 0001
CO-CHAIR JIM WHITAKER called the House Special Committee on Ways
and Means meeting to order at 7:08 a.m. Representatives Hawker,
Whitaker, Heinze, Kohring, Weyhrauch, Wilson, and Moses were
present at the call to order. Representative Gruenberg arrived
as the meeting was in progress. Representatives Ogg, Seaton,
Cissna, and Gara were also present.
HB 298-DISTRIBUTIONS OF APPROPS FROM PERM FUND
Number 0132
CO-CHAIR WHITAKER announced that the first order of business
would be HOUSE BILL NO. 298, "An Act relating to the
distribution of appropriations from the Alaska permanent fund
under art. IX, sec. 15(b), Constitution of the State of Alaska,
and making conforming amendments; and providing for an effective
date."
CO-CHAIR HAWKER moved to adopt committee substitute (CS) for HB
298, Version 23-LS1075\D, as the working document. There being
no objection, Version D was before the committee.
Number 0254
ROBERT BARTHOLOMEW, Chief Operating Officer, Alaska Permanent
Fund Corporation, Department of Revenue, testified on HB 298.
Mr. Bartholomew told the committee in reviewing the original
version of HB 298 there were several changes that affected
statutes that cover the Alaska Permanent Fund Corporation and
the distribution of funds out of the permanent fund. The
changes in the CS begin in Section 3, page 3. He explained that
there were two concerns that need to be addressed.
Number 0353
CO-CHAIR WHITAKER interrupted Mr. Bartholomew and asked him to
give the committee a brief explanation of the purpose of HB 298
before delving into the changes incorporated in the CS.
Number 0404
MR. BARTHOLOMEW explained that the committee has already passed
out HJR 26, which is a constitutional amendment that changes how
the [Alaska Permanent Fund Corporation] determines how much
[money] should be available from the permanent fund and how to
accomplish inflation-proofing [the fund]. Mr. Bartholomew
pointed out that some of the provisions in the constitutional
amendment affect the existing statutes that cover prior methods
that were used for the permanent fund. The legislation amends
the statutes to ensure that [the statutes] will work in
accordance with the payout of market value [POMV] concept. The
statutes have been reviewed to see what needed to be updated, he
said. He told the members that the sections he will speak to
[in the CS] are those that specifically address how money is
appropriated out of the permanent fund. He said he is not
familiar with [all] the changes that were made in Sections 1 and
2.
REPRESENTATIVE WEYHRAUCH asked if there is a sectional analysis
on this bill.
CO-CHAIR WHITAKER replied that there is not.
Number 0558
MR. BARTHOLOMEW explained that in Section 1 there is a language
change in which the reference to the "distribution of Alaska
permanent fund income" to [the permanent fund dividend].
MR. BARTHOLOMEW went on to say that Section 2 has the same
change where the word "income" is removed and the word
"appropriations" is added. These changes to both Sections 1 and
2 make the statutes work with the constitutional amendment that
has been proposed [in HJR 26]. Mr. Bartholomew pointed out to
the committee that the effective date of HB 298 is tied to the
successful passage of the constitutional amendment by the
public.
CO-CHAIR WHITAKER summarized that Sections 1 and 2 are really
housekeeping changes.
Number 0716
LARRY PERSILY, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, testified on HB 298. He told the
committee that Section 1 really only deals with language related
to jury duty lists, and assures that it conforms with the new
definition of paying the permanent fund dividend based on the
new law. Section 2 deals with the new definition of permanent
fund appropriations as it applies to the authority of the
Legislative Budget and Audit Committee. He commented that both
Sections 1 and 2 are merely technical measures.
CO-CHAIR WHITAKER noted for the record that Representative
Gruenberg had joined the committee.
Number 0801
REPRESENTATIVE GRUENBERG pointed out that he does not believe
the changes to Sections 1 and 2 need to be conditional on the
passage of the constitutional amendment since they are only
housekeeping changes.
CO-CHAIR HAWKER asked whether these are housekeeping matters as
a result of the passage of HJR 26, or would these changes be
necessary anyway.
Number 0844
REPRESENTATIVE GRUENBERG replied that he believes these changes
are still appropriate [whether HJR 26 passes or not].
Furthermore, the language is more understandable to the average
Alaskan and the jury clerk.
Number 0906
MR. BARTHOLOMEW explained that Section 3 is a new section added
to describe how appropriations are made from the permanent fund.
He pointed out to the committee that later in the bill the
existing provisions are repealed. Section 3 will be the
language that the legislature would look at in describing
appropriations from the fund. Mr. Bartholomew told the members
that as written in the bill, no more than 60 percent of the
total amount available under the 5 percent spending limit would
go to the general fund and not more than 40 percent of the total
amount available for appropriation would go to the dividend
fund.
Number 1000
CO-CHAIR WHITAKER commented that this is the meat of bill.
MR. BARTHOLOMEW pointed out that the difference between the
original bill and the CS is the [clarifying language] that this
legislation is about an individual specific fiscal year and that
it is not necessary to spend the entire amount, but that not
more than 60 percent [for general fund appropriation] and [not
more than 40 percent for dividends] will be spent. He
summarized that the appropriations could be anything from zero
up to those amounts.
MR. BARTHOLOMEW told the members that Section 4 is a new section
being added at the request of the permanent fund's [legal]
counsel. This language clarifies what method the permanent fund
is going to use in determining that year-end market value. He
added that there has been discussion about how it is determined
and this language would clarify that the permanent fund will be
computed by market value in accordance with generally accepted
accounting principles (GAAP) after the costs to manage the fund
have been taken out. He reiterated his comments by saying that
the year-end market value is determined after the cost of
managing the fund is taken out and before any of the
distributions covered in Section 3 occur. Clarifying all of
this is the purpose of Section 4, he added.
Number 1118
CO-CHAIR HAWKER asked if Section 4 would result in using a mark
to market valuation.
Number 1135
MR. BARTHOLOMEW responded that is correct. He explained that
the current requirement of using generally accepted accounting
principles means that at the end of each month, when financial
statements are done, all investments of the permanent fund are
recorded at their market value. So the mark to market [value]
includes all those investments as the market goes up and down.
These changes are tracked, reported, and recorded at their
market value on June 30.
Number 1213
REPRESENTATIVE SEATON asked if it would be better to state that
all expenses that are incurred by the [permanent] fund are
deducted from the fund before the market value is determined.
He said he would not want to see this legislation challenged or
in a position in which it is necessary to [continually] explain
it.
MR. BARTHOLOMEW agreed with Representative Seaton that is a good
point. He referred to Section 5 which outlines how this process
works and pointed out that the cost to manage the fund and the
operating budget for the Alaska Permanent Fund Corporation comes
out of revenue that is generated [by investments]. In other
words, it comes off the top. He explained that is what is being
maintained in Section 5 of HB 298. Mr. Bartholomew told the
members that when this law was written many years ago it was
done so that if there is no net income, and for example, like
last year when the fund incurred a net loss, there would still
be funds to pay the expenses of managing the fund. The costs
[of running the fund] are coming out of revenue, he said.
MR. BARTHOLOMEW went on to say that Section 4 requires that at
the end of a year a determination is made as to the net value in
accordance with GAAP, which includes several key concepts such
as marking all investments to market and deducting the cost to
manage and run the [permanent] fund. That is how the value is
determined. Mr. Bartholomew summarized that Sections 4 and 5
read together specifies that the intent is for the cost of
managing and investing the fund to come out of revenues, and not
out of the 5 percent that is based on value. He agreed with Co-
Chair Whitaker that these sections of the bill maintain the
status quo.
Number 1525
MR. PERSILY clarified that the money that Mr. Bartholomew is
talking about to manage the fund is subject to appropriation as
approved by the legislature every year. It is not a matter of
the Alaska Permanent Fund Corporation just taking the funds as
it wants; it is part of the budget appropriation process.
Number 1546
REPRESENTATIVE GRUENBERG told the committee that he has seen
private corporation change the bottom line due to changes in
accounting principles. When this happens it can really change
the earnings for that particular year. He said he knows that
companies always notify stockholders when that happens, and
since he is not an accountant he accepts that is the way
corporations do business. Representative Gruenberg recalled Mr.
Bartholomew's testimony in other meetings where he referred to
the way managers of the fund can manipulate earnings which would
have a considerable impact on the earnings of the fund and the
dividend for that year. He noted that this is the first time he
has seen the use of the term GAAP in any state statute, and
asked if there is any statute that generally requires the use of
the term GAAP.
Number 1731
MR. BARTHOLOMEW responded that for the last 20 years the Alaska
Permanent Fund Corporation has been required by statute to
follow GAAP with one exception. That exception was to ignore
unrealized gains and losses which is called the mark to market,
he said. He explained that the permanent fund has not been
required to follow GAAP for purposes of determining how much
money can be taken out of the permanent fund and how much to pay
for dividends, and that is the exception. Mr. Bartholomew said
theoretically how much revenue is recorded could be changed by
deciding to buy or not sell certain investments. There is also
a financial accounting statement in accordance with GAAP with no
exceptions. He reiterated that the permanent fund does two
separate sets of accounting records, one for GAAP and one that
is required by statute with the one exception to GAAP, and then
the dividend is calculated. He told the members that this bill
actually simplifies and takes away the ability to theoretically
delay or accelerate the taking of gains to affect the formulas.
Mr. Bartholomew emphasized that this has not happened except for
investment or policy reasons that were discussed.
Number 1909
REPRESENTATIVE GRUENBERG turned to AS 37.13.140, which is being
repealed in Section 11, page 6, line 15. That statute was the
partial implementation of the GAAP for the purposes of
determining net income only. Representative Gruenberg said he
applauds [the implementation of GAAP]. He asked Mr. Persily if
any state statute is in place that requires the use of GAAP.
MR. PERSILY replied that he is not familiar with any, but he
said he does know that the performance measures which are in
statute for the Department of Revenue makes reference to that
[in missions and measures].
Number 2023
CO-CHAIR HAWKER informed the committee that GAAP is a term of
art by accounting bodies of the United States. There are
international accounting principles in which government entities
are subject to Governmental Accounting Standards Board (GASB).
He explained that enterprise operations operating as public
corporations can adopt either business principles or government
principles. In the Alaska permanent fund's case it is viewed as
an operation that is much better served by GAAP rather than by
GASB. He noted that both of these are interactive standards
which support the conclusion that the permanent fund is more
properly under the auspices of business accounting principles.
He pointed out that in order for state financial statements to
be certified it must conform to GASB principles. He summarized
his comments by saying that in most cases GASB adopts GAAP, and
the Financial Accounting Standards Board (FASB) is the basis for
GAAP.
Number 2304
RON LORENSEN, Attorney, Simpson, Tillinghast, Sorensen, and
Longenbaugh, testified as outside counsel to the Alaska
Permanent Fund Corporation on HB 298. He clarified that the
Alaska Permanent Fund Corporation operates under GASB
principles, not under business principles. The reference to
GAAP is the generic reference to those principles which are
applicable to the fund and those principles are actually GASB,
rather than FASB. In response to Representative Gruenberg's
question that the committee should not even be discussing GAAP,
he replied that GAAP actually refers to both GASB and FASB; it
depends on which kind of an entity a corporation is. He
reiterated that the lower case [GAAP] generally accepted
accounting principles is a generic reference to those accepted
accounting principles which are applicable, and emphasized that
those which are applicable to the Alaska Permanent Fund
Corporation are the GASB principles. Using GAAP in a generic
sense is a correct reference, he said.
Number 2453
CO-CHAIR WHITAKER point out that the question is whether
unrealized losses and gains are accounted for on June 30.
MR. BARTHOLOMEW replied that is correct. He said that the main
change that is being made is that the current language, which
directs the Alaska Permanent Fund Corporation to exclude those
unrealized gains and losses when a determination of income
available for appropriation, will go away and the fund will
comply with generally accepted accounting principles that cover
accounting for investments that Co-Chair Hawker referred to as
mark to market. That is the industry standard and what the fund
will be moving to, he said.
CO-CHAIR WHITAKER asked Mr. Bartholomew to put this change in
perspective, since this is not just a question of semantics and
nomenclature; it is a significant policy change.
Number 2554
MR. BARTHOLOMEW replied that in looking at the permanent fund as
June 30 approaches, accounting records are kept according to
statute, excluding unrealized gains and losses. The earnings
reserve of the permanent fund is in two pieces. There is the
realized earnings reserve, which currently has $1.2 billion and
that is where the bond interest, stock dividend, and rental
incomes from real estate [are held]. This is a cash flow
account and is called the realized earnings reserve [account]
based on realized income.
MR. BARTHOLOMEW explained that there is a second earning reserve
[account], and according to statute when the fund is determining
what is available, it excludes the unrealized gains and losses.
Those funds are kept in a separate account because the financial
statements require that the funds be recorded. That account is
for volatility, it has varied from a positive $4 to $5 billion
of unrealized gains to over $1 billion in losses, which occurred
twice this year. That account does have a lot of volatility,
but it is important because it shows what is going on with the
value of investments, he said. The permanent fund currently
accounts for them separately and there is confusion between the
statutes saying to ignore them and GAAP saying the fund is
required to record them so the value of investments is known.
Mr. Bartholomew explained that this bill would say it is
important to recognize both; do not separately account for them.
There is one fund and the value of that fund includes the cash
flow received and the gain or loss in investments. When the
Alaska Permanent Fund Corporation determines the value of fund
on June 30 for determining what is available, it will be the
true value of the fund, including unrealized gains and losses.
He emphasized that is an important change.
MR. BARTHOLOMEW, in response to Co-Chair Whitaker, explained
that mark to market is accounting nomenclature.
Number 2818
MR. LORENSEN commented that it is important to be clear that the
permanent fund presently marks to market the value of the fund
under GASB principles. The change is that it will no longer be
a determination of income. That varies from GASB principles; by
deleting [AS 37.13.140 in Section 11 on page 6, line 15 in the
bill] there will no longer be a separate statutory earnings
reserve account determination which calls for applying GAAP
while taking out the unrealized portion. Income in the future
will be determined according to GAAP OR GASB and the market
value will be determined according to GASB. There will not be a
change in the way market value is determined. This [language]
clarifies, for the purposes of a constitutional amendment, that
is the way it is to be determined.
Number 2915
REPRESENTATIVE GRUENBERG noted that this is extremely important
because it is the basis for the calculation of the dividend. He
asked if these changes could be implemented without a
constitutional amendment.
MR. BARTHOLOMEW responded that changes in accounting could be
done in statute, as it is currently defined. How the
determination of what's available from the permanent fund for
appropriation is done in statute, he noted. This legislation
would amend existing statutes. Both of these are statutory
issues, he said. He told the members the change is due to the
constitutional amendment which would implement a spending limit
based on value.
TAMARA COOK, Director, Legislative Legal and Research Services,
Legislative Affairs Agency, responded to Representative
Gruenberg's question by saying that she is not nearly as certain
that the Alaska Permanent Fund Corporation can statutorily
achieve the distribution that is setout in the work draft that
is being considered. She said her uncertainty is based on the
existing language in the constitution. She read [portions of]
Section 15 of the Alaska Constitution which says:
The principle can be used only for income producing
investments designated by law as eligible. All income
from the permanent fund shall be deposited in the
general fund unless otherwise provided by law.
MS. COOK told the committee that is all that is in the existing
provision of the constitution with respect to uses that can be
made of the permanent fund other than investment. She said she
does not see how an unrealized gain can be deposited into the
general fund. Consequently, an unrealized gain cannot be the
kind of income to which this constitutional provision is
referring and thus an unrealized loss cannot be the type of
income to which the constitution is referring. The constitution
is talking about funds that can be physically deposited in the
general fund, and if the legislature were silent, that is what
would happen, she commented.
Number 3334
REPRESENTATIVE GRUENBERG commented that it seems to him that
this is not a discussion about deposits to the general fund
rather it's really about the basis of the calculation of
dividend. He asked if that requires a deposit to the general
fund.
MS. COOK replied that it does not. However, the reason the
existing statute enables the state to have an earnings reserve
account is because the sentence [in the constitution] goes on to
say, "unless otherwise provided by law this income will be
deposited in the general fund." [The legislature] has provided
a law that the income will be deposited into the earnings
reserve account of the permanent fund. If no law were in place,
these funds would go into the general fund. Ms. Cook explained
that in order for the court to agree that the word income in
this context includes market value analysis, the court must
agree that an unrealized gain or loss would automatically flow
into the general fund. Ms. Cook noted that she is not an
accountant, but neither are the justices of the supreme court.
She explained that the justices tend to look at the language in
the same way a common person would. Ms. Cook said that those
who have witnessed fluctuations in retirement accounts well know
there is no income until the income is realized. She pointed
out that unrealized gains are just not there when moving money
from one pot to other. Once income is moved into the general
fund there is the implication that it is immediately available
for expenditure. How can the legislature immediately expend
unrealized income in the general fund, she asked. The present
constitution, at the very least, creates a question as to
whether it would be possible to go to a market value approach in
the use of money from the permanent fund.
Number 3602
REPRESENTATIVE GRUENBERG asked if Mr. Lorensen agrees with Ms.
Cook.
MR. LORENSEN responded that he does agree with Ms. Cook. He
said the issue that Ms. Cook just described is the subject of an
attorney general's opinion that is being written. Until the
opinion is issued, he said he does not know what the real answer
is. However, he told the members his own view is similar to
that of Ms. Cook. He said he does not believe a market value
based distribution can be implemented under the current form of
the constitution.
Number 3648
REPRESENTATIVE GRUENBERG commented that this is important
because there may be a requirement to have a constitutional
amendment and a conditional effective date. The other way of
approaching this issue is with a standard or no effective date,
which would mean it would be 90 days after the governor signs
the bill. Representative Gruenberg offered that one way to
approach this is to provide two effective dates.
MR. LORENSEN remarked that he does not believe [this can be done
without amending the constitution.]
Number 3818
MR. BARTHOLOMEW said he believes that HB 298 was written on the
premise that HJR 26 would pass and then HB 298 would be
effective and if it did not pass, then it would not be
effective. He explained that when changing to the market value
approach, instead of an income-based approach for determining
what is available from the permanent fund, the 5 percent
spending limit that the board of trustees is proposing is a very
essential part of the protection. When there is a high stock
market, as was the case in 1998 and 1999, the permanent fund
could go up by billions of dollars; under market value that
amount of money over principle is available. Mr. Bartholomew
added that in the past there has been $5-6 billion available for
appropriation. The fund's [managers] believe that the fund
cannot be invested in long-term assets, such as stocks and real
estate, if there is a risk that large amounts of money could be
appropriated. That is the driving force for the need for
stability and predictability with regard to what's going to come
out of the fund, he said. The 5 percent spending limit is very
important when changing what comes out of the fund. Mr.
Bartholomew summarized his comments by saying he would be very
hesitant to support anything in HB 298 without understanding
that this all came from the concept of being partnered with the
constitutional amendment [HJR 26]. He emphasized that
everything being considered needs to be tied to the successful
passage of the constitutional amendment.
Number 4026
CO-CHAIR WHITAKER pointed out that the manner in which the value
of the fund is determined, the mark to market, is part of the
discussion and is a significant change. This legislation is
saying that at a certain point in time this is the value of the
fund. This approach is different than the option and policy of
not recognizing the swing in the market, or unrealized gains and
losses. He asked if this would be considered a big policy
shift.
MR. BARTHOLOMEW responded that it is a change, but he hesitated
to say it is a big shift because it is really a timing
difference. He commented that over time, realized and
unrealized [income] will equal, but those timeframes can be very
long.
CO-CHAIR WHITAKER asked if he is correct in assuming that by
passing HJR 26 and HB 298 the legislature would preclude a
[scenario in which there aren't adequate funds to pay a
dividend].
Number 4351
MR. BARTHOLOMEW replied that is correct. The intent of HJR 26
and HB 298 would be to ensure an annual distribution each year.
Currently there is the risk that the distribution formula could
lead to a zero distribution from the permanent fund dividend, he
said.
CO-CHAIR WHITAKER stated that this is a significant policy
change.
Number 4431
REPRESENTATIVE WEYHRAUCH turned attention to an opinion prepared
by Legislative Legal and Research Services that indicated that
there were certain IRS implications if the permanent fund were
to be structured as a guaranteed dividend and thus the fund
could be subject to taxation. He asked if she would comment on
this point.
Number 4507
MS. COOK replied that she believes Representative Weyhrauch is
referring to the concern expressed by the trustees of the Alaska
Permanent Fund Corporation. The tax-exempt status of the
permanent fund is determined by it being viewed as a
governmental fund that is of a public nature. The test that the
IRS uses tends to look at whether it is a private versus a
governmental benefit. Currently, the permanent fund has been
used to pay dividends to individuals in Alaska, but that is been
the result of a decision that the legislature makes when it
appropriates money each year. It does satisfy a public purpose.
Ms. Cook went on to say the question is whether the legislature
has eroded the governmental nature of that fund if a
constitutional provision were setup so that a private right is
created in the fund. She reiterated that she is not a tax
attorney and does not know how intense the danger is regarding
whether the IRS would determine that all or a portion of the
income of the fund is subject to taxation. Ms. Cook said the
heart of the problem is at what point does the legislature
change the nature of a public fund so radically that there is a
risk that the fund will lose its tax-exempt status because of
the private benefit associated with the fund.
TAPE 03-24, SIDE B
MR. BARTHOLOMEW agreed that's the issue.
Number 4527
REPRESENTATIVE WEYHRAUCH asked for a copy of Ms. Cook's opinion
on this matter. He said he would like to meet with her and the
administration to review the analysis of Section 3(2) to see if
it "invades" the IRS concern.
Number 4432
REPRESENTATIVE HEINZE asked if some visual tools could be
developed to help legislators explain this [concept] to the
public.
CO-CHAIR WHITAKER assured Representative Heinze that information
would be made available.
Number 4302
MR. BARTHOLOMEW turned attention to Section 6 of the CS. The
Permanent Fund Corporation handles investments for several other
funds, including the Alaska Mental Health Trust Fund (AMHTF) and
the Alaska Science and Technology Fund (ASTF). This section
brings in sync how the permanent fund would do the accounting
for the investments of the Alaska Mental Health Trust Fund. Mr.
Bartholomew explained that there needs to be a discussion with
the managers and board of AMHTF in order to ensure they
understand the proposal made in Section 6. That discussion has
not yet taken place, he said.
MR. BARTHOLOMEW explained that Section 7 covers the Alaska
Science and Technology Fund which has been the subject of a lot
of discussion in the legislature this year. Section 7 would
change the statutes such that ASTF would be accounted for in a
way that is similar to the permanent fund. Section 8 addresses
the Alaska International Trade and Business Fund.
CO-CHAIR WHITAKER noted that these funds are of concern because
the permanent fund manages these three funds.
Number 4041
MR. PERSILY commented that Section 9 is a technical [change
related to the change] in Sections 1 and 2. Section 9 deals
with paying the dividend each year so instead of defining income
of the permanent fund, it is defining money appropriated from
the permanent fund. The same change is found in Section 10
where there is technical change from "income" to "amount."
These changes conform the sections with the new method and
language.
Number 3955
CO-CHAIR WHITAKER inquired as to the reason for repealing
Section 11.
MR. BARTHOLOMEW responded that in Section 11 AS 37.13.140 and
.145 are being repealed because they are replaced by Sections 3
and 4 in the existing bill. The third statutory noted, AS
37.13.300(c), is a technical amendment complying with the
[Alaska Mental Health Trust]. He said Section 12 covers the
conditional effect.
Number 3847
CO-CHAIR WHITAKER said that the CS proposes that 60 percent of
the amount of money available be appropriated to and for
purposes of government.
REPRESENTATIVE WILSON recalled that according to the graphs
shown to the members, it was determined that this would be the
best way to approach this issue in the long run and keep the
fund as stable as possible. She told the members she does not
have the graphs in front of her, and asked if someone would
summarize the three options that were highlighted.
Number 3705
CO-CHAIR WHITAKER provided the members with a copy of the
graphs. He explained that by looking at the graphs from a
purely governmental fiscal perspective the preferential option
is [60 percent for governmental purposes and 40 percent for
dividends]. The 50-50 [percent option] has less stability. The
40-60 [percent] option with 40 percent for governmental purposes
and 60 percent for dividend distribution leads the state on a
short course to continued deficient spending with no
constitutional budget reserve. This is a policy and economic
call, he stated.
Number 3500
REPRESENTATIVE GARA inquired as to Ms. Cook's legal opinion
regarding the use of a severability clause in the constitution
that would be triggered if a tax consequence were to come about.
For instance, if the dividend is constitutionally protected and
that causes a tax implication then the severability clause could
ensure the state avoids the problem that way.
MS. COOK explained that severability clauses work in statute.
However, this kind of clause would not be a severability
provision, rather it would be an alternative constitutional
provision that would take effect only if certain conditions are
met. Ms. Cook said she does not see why there could not be any
number of alternative provisions that are triggered, given that
each one in itself would be an amendment to the constitution.
Number 3300
REPRESENTATIVE GARA posed a hypothetical situation in which an
amendment to the constitution on the dividend were put in place
and caused a tax implication. If amending the constitution in
this way meant this would be a problem for the IRS, would a
provision in the constitution allowing for a three-quarters vote
of the legislature, as is provided in other sections of the
constitution, solve the IRS' concern.
MS. COOK responded that it might. She said she does not know
how the IRS would respond; they are a mysterious force. There
may be enough legislative discretion because the legislature can
only appropriate money for a public purpose. Ms. Cook pointed
out that the Alaska Supreme Court has already acknowledged that
the permanent fund dividend appears to serve a public purpose.
Maybe the IRS would agree, she commented.
Number 3116
REPRESENTATIVE GARA told the members that he does not understand
why the public purpose versus private purpose issue raises
questions [with the IRS]. He asked if that issue is discussed
in her [opinion].
MS. COOK said she has not discussed that issue because she does
not understand it and thus she strongly urged the legislature to
obtain an independent view from a tax attorney. She noted that
there have been states that have set up funds that the IRS
determined created enough of a private benefit to have taxed
them. She summarized her comments by saying there is the
theoretical potential to be a problem.
Number 2958
REPRESENTATIVE OGG commented that the [Constitutional Budget
Reserve Fund] CBRF End-of-Year Balance chart reflects that the
two proposals on one end or the other buys the state about 3
years. He asked if it is possible to have more flexibility in
Section 3 so that the legislature could decide in any given
climate which option of 60 percent to select; either 60 percent
to the general fund [or 60 percent to the dividend]. He asked
if that flexibility is desirable.
CO-CHAIR WHITAKER commented that Representative Ogg raises a
good point. He asked if the legislature has the consensus to do
that and determine the dividend on a yearly basis.
REPRESENTATIVE OGG reiterated his question as to the
advisability of putting that kind of flexibility in the bill.
REPRESENTATIVE WILSON commented that this premise would raise a
big fight every year. It would also extend the time spent on
this issue.
Number 2654
CO-CHAIR WHITAKER agreed with Representative Wilson. This bill
will allow the legislature to go to the voters and define the
split, rather than saying every year the legislature will
decide. There may be a "trust me" factor [connected to that
flexibility].
REPRESENTATIVE OGG offered that inserting language up to 60
percent allows the legislature [to look at the fiscal climate]
and decide what percent to appropriate for dividends and the
general fund.
CO-CHAIR WHITAKER said Representative Ogg's suggestion sounds
like he would like to run government like a business. In a
business environment one could look at the fiscal situation, say
it's a difficult time, and since the books can't be balanced,
not give a dividend. That would be purely a business decision,
he commented.
REPRESENTATIVE WILSON said if the public realizes what that
[change] would do, she said she believes they would want more of
a guarantee that [a dividend] would be there rather than have
that option [come and go] from year to year.
Number 2349
CO-CHAIR WHITAKER asked the members to give some thought to this
subject. He said he hopes to move the bill from committee at
the next meeting.
[HB 298 was held over.]
Number 2321
The House Special Committee on Ways and Means meeting was
recessed at 8:15 a.m. to a call of chair.
TAPE 03-25, SIDE A
Number 0040
The meeting reconvened 5:05 p.m. Members present were
Representatives Hawker, Whitaker, Rokeberg, Weyhrauch, Wilson,
Gruenberg, and Moses. Representatives Heinze and Kohring
arrived as the meeting was in progress. Representatives Ogg and
Seaton were also present.
HB 293-STATE SALES AND USE TAX
CO-CHAIR WHITAKER announced that the next order of business
would be HOUSE BILL NO. 293, "An Act levying and collecting a
state sales and use tax; and providing for an effective date."
MR. PERSILY explained that originally HB 293 was a state sales
and use tax. The version before the committee now includes an
increase of $.12 per gallon in highway motor fuel tax that had
been proposed by the governor at the beginning of the session.
There are no changes in aviation gas, jet fuel, marine fuel, or
off-road motor fuel, he added.
Number 0223
CO-CHAIR HAWKER moved to adopt CS for HB 293, Version CSHB 293
bil.doc, dated 5/8/03, as the working document. There being no
objection, Version CSHB 293 bil.doc, dated 5/8/03, was before
the committee.
Number 0225
MR. PERSILY explained that Section 1 of the bill is the
enforcement provision for motor vehicles that might be purchased
out of state. What this says is if an individual wishes to
register his/her vehicle in Alaska, it will be necessary to show
proof that the sales and use tax has been paid. Section 2
rewrites a significant portion of Title 29, it is rewritten to
eliminate the municipal authority to enforce, collect, and
administer sales and use taxes, he said. Under this version the
Department of Revenue would be responsible for administration,
enforcement, and collection of the sales and use tax. The
exemptions would be set by the legislature in statute and would
be applied to the rate rules municipalities want collected. The
[tax] rate for municipalities would still be up to them, but the
exemptions, rules, and enforcement would be handled by the
state.
MR. PERSILY went on to say Section 7 deals with the motor fuel
tax increase which would go from 8 cents a gallon to 20 cents a
gallon. He reiterated that this increase would not include
aviation gas, jet fuel, marine fuel, or off-road motor fuel.
Number 0409
REPRESENTATIVE WEYHRAUCH asked about Sections, 3, 4, 5, and 6.
MR. PERSILY responded that those sections are the rewrites of
Title 29. He explained that this legislation sets a combined
cap of state and municipal sales tax of 8 percent. Section 3
covers a phase-in [sales tax]. This legislation specifies that
when the tax goes into effect on January 1, 2004, whatever [tax]
the municipality has in place at that time will remain in place.
Therefore, if there is not sufficient room between the 8 percent
cap and what the municipalities have [on the books], the state
would collect less [in state sales taxes]. For example, if a
city gets a 6 percent tax as of January 1, 2004, the state would
collect 8 percent in that community, the city would receive its
full 6 percent, and the state would receive 2 percent. Mr.
Persily noted that this bill has a seasonal sales tax feature to
it because there is a 2 percent sales tax from October 1 through
March 31 and 4 percent sales tax from April 1 to September 30.
He explained that he is providing an overview of the bill rather
than going section by section.
Number 0617
MR. PERSILY turned attention to Section 9, page 9, line 21,
where it spells out the state's portion of the tax under the
seasonal tax. Section 3, page 4, describes how the sales tax is
shared with municipalities.
REPRESENTATIVE WEYHRAUCH commented that this would mean if an
individual purchased a car in the summer he/she would pay more
tax than if it was purchased in the winter.
MR. PERSILY responded that would depend on where the individual
lives. For example, Petersburg has a 6 percent tax and because
there is an 8 percent cap, those residents would pay 8 percent.
However, if the buyer lives in Anchorage, there would be a 2
percent tax in the fall [and winter] and 4 percent tax in the
spring and summer because Anchorage [don not already have a
municipal sales tax].
REPRESENTATIVE WILSON asked if a Petersburg resident could buy a
vehicle in Anchorage, pay the sales tax there because it is
lower. She asked if the sales tax would only be charged where
the vehicle was purchased, provided the purchase took place in
state.
Number 0745
ROBYNN WILSON, Revenue Auditor, Tax Division, Department of
Revenue, answered questions on HB 293. In response to
Representative Wilson's question, she replied that it would
depend on whether that municipality had a use tax. She pointed
out that many localities do not have a use tax. For example, if
a car was purchased in Anchorage and taken to another city if
that city had a use tax, there would be some rate adjustments.
If the city where the purchaser lived did not have a use tax,
then he/she would just pay the tax where it was purchased.
Number 0809
REPRESENTATIVE WILSON concluded then that if she purchases a car
in state, and returns home with it, she would not have to pay a
tax where she lives.
MS. WILSON replied that if the town where she lives does not
have a use tax, that would be correct. If the town does have a
use tax then there may be an additional fee. In further
response to Representative Wilson, Ms. Wilson clarified that she
would not pay the state tax again, but there may be a municipal
portion that may be adjusted if the city [in which she lives]
has a use tax.
Number 0933
MR. PERSILY provided the following example. If an individual
buys a vehicle in a community that has a 2 percent tax and
brings it back to his/her community where there is a 5 percent
use tax. In this case, the individual would owe the community
the 3 percent difference.
CO-CHAIR WHITAKER pointed out that is no different than [the
current policy]. He explained his comment by saying that if she
were to purchase a vehicle in Anchorage today and return to her
community with the vehicle, she would have to pay her
community's use tax.
REPRESENTATIVE WILSON responded that she did not do that [when
she purchased a vehicle].
MR. PERSILY pointed out that without the connection to the
vehicle registration, enforcement is very difficult. Therefore,
this legislation includes a provision that specifies that in
order to register a vehicle there must be proof of sales tax
payment. The aforementioned would ensure that individuals do
not buy cars in the Lower 48 in order to avoid sales tax.
Number 1036
MR. PERSILY told the committee that in Section 3 the department
was directed by the co-chairs to craft a way to phase-in a point
at which the state gets its full 2 percent and 4 percent, and
the communities get their 2 percent and 4 percent. This would
allow time for communities to adjust their sales tax to stay
within the 8 percent cap. On January 1, 2004, any municipal
sales tax that is in effect will be collected by the full amount
by the state. On January 1, 2008, the maximum municipal sales
tax would be 6 percent. In response to Representative
Gruenberg, Mr. Persily specified that the aforementioned
language is in Section 3 on page 4, line 22.
Number 1141
CO-CHAIR WHITAKER announced that Mr. Persily will be working
through the bill section by section, but if he comes to a point
in the bill where it is necessary to look at another section to
fully understand it, then he will move to that section. The
committee is looking at Section 3, page 4, lines 21-26, he said.
CO-CHAIR WHITAKER noted for the record that Representative
Seaton had joined the committee.
Number 1220
MR. PERSILY told the members that municipalities with a sales
tax will continue to receive the full amount of the municipal
tax for four years, through January 1, 2008. After January 1,
2008, state statute would specify that the maximum municipal
sales and use tax would be 6 percent. Therefore, a community
with a 7 percent sales tax would see a decrease in tax revenues
by 1 percent. On Jan 10, 2010, the maximum municipal sales tax
rate would go to 5 percent during the summer, because during the
winter the state is only taking 2 percent so there is still 6
percent available for municipalities. However, during the
summer of 2010 the maximum municipal rate would go to 5 percent.
During the summer of 2012 the maximum municipal sales tax would
be 4 percent, and the tax could still be 6 percent the rest of
the year. The intent of this [phased-in approach] is to give
municipalities time to adjust to a state-mandated lower rate and
also allow municipalities to see how the state exemptions and
state administered sales tax [impact revenues]. Mr. Persily
noted that if this bill were to pass, many communities may find
they could collect the same revenue with a lower tax rate.
Number 1348
CO-CHAIR WHITAKER asked Mr. Persily to comment on what affect
the period between January 1, 2004, and January 1, 2008, would
have on municipalities.
MR. PERSILY responded that during that time period the state
would collect whatever sales tax rate is on the books and the
cities would receive the full collections off of that rate. He
agreed with Co-Chair Whitaker's statement that there is a 4-year
adjustment period and then a four-year set-down period.
Number 1431
REPRESENTATIVE SEATON asked for clarification that the
percentage goes up to 4 percent in the summer because the state
anticipates that there will be higher revenues then. However,
he interpreted that to mean that when there are higher revenues,
the municipalities will collect less taxes.
MR. PERSILY clarified that what the state is saying in this
legislation is that a seasonal feature is important to pass more
of the burden on to nonresident visitors. Those cities that
have sales taxes at 5-7 percent will have to reduce their rate
to stay within the 8 percent cap for the eventual 4 percent
state collection. Mr. Persily noted that because of fewer state
exemptions these cities may not see a loss of revenue. It would
be necessary, once the state code is adopted, to compare it with
the municipal code item by item in order to see how it would
affect local collections.
Number 1542
REPRESENTATIVE SEATON surmised that legislators will not know
what affect this required seasonal reduction in sales tax will
have on municipalities until the entire process is complete.
MR. PERSILY responded that each of the municipalities' finance
officers could look at the bill, compare it to its existing
code, and probably reach a good estimate with regard to how this
bill would affect municipal collection.
Number 1621
REPRESENTATIVE OGG said in the summer Kodiak has a lot of people
buying groceries for the fishing season. Kodiak's current sales
tax is 6 percent, [with this bill it] would be up to 8 percent.
Therefore, he surmised that the tendency would be for people to
purchase supplies in Anchorage where the sales tax would only be
4 percent. He asked if Mr. Persily believes that kind of impact
will be felt [by communities such as Kodiak].
MR. PERSILY acknowledged that imposing a higher sales tax on
communities that already have one, means there is a risk of
affecting the local economy. He stated that he could not
speculate on the impact, although it is something the committee
will want to consider. Mr. Persily commented that human nature
being what it is there will be some people who will go out of
their way to save a little money. Adding to the sales tax is
going to increase the cost of purchasing goods. He said he
could not provide any estimates between communities, but common
sense says that it would affect some spending decisions.
Number 1815
REPRESENTATIVE OGG commented that most of the testimony heard on
this bill has come from areas outside the metropolitan areas of
Fairbanks or Anchorage and many of these communities already
have high sales taxes. He said it would be good to know what
impact this bill will have on small communities. He questioned
whether this will cause commerce to flow out of smaller
communities to [larger urban] areas.
MR. PERSILY replied that the department does not have the
ability to create a model to predict the impact of a higher
sales tax and the effect it will have on shopping habits.
Although there may be economists somewhere in the country that
could do that, he said he does not know of anyone who could do a
credible model.
Number 1930
REPRESENTATIVE OGG said he believes there is a delicate balance
and if it is altered, then things start to shift. He said he
wants to know what that potential shift will be before moving
into it.
CO-CHAIR WHITAKER reiterated that if the legislature does not do
something, the consequences are dire. He added that it will be
necessary to make adjustments to the bill in this body as well
as the other body. This bill allows for a time period of
adjustment.
CO-CHAIR WHITAKER noted for the record that Representatives
Heinze and Kohring had joined the meeting.
Number 2108
REPRESENTATIVE SEATON asked Mr. Persily if he understands this
correctly. In communities that have, for example, a 6 percent
sales taxes in place, the tax would be capped at 8 percent. The
same 8 percent will be charged, but based on whether it is
winter or summer will determine what [percentage] goes to the
city and what [percentage] goes to the state.
MR. PERSILY responded that is correct.
Number 2149
REPRESENTATIVE WILSON offered a hypothetical example in which
the sales tax is 6 percent in Kodiak. In such a situation, what
would the City of Kodiak collect in 2004, she asked.
MR. PERSILY replied that on January 1, 2004, the state would
collect a total of 8 percent with 6 percent going to Kodiak and
2 percent to the state. Under this bill, in Kodiak's case there
would be a 5 percent limit January 1, 2010. During the summer
months the state would continue to collect 8 percent of which 5
percent would go to Kodiak and 3 percent to the state. In the
winter months, the state would continue to collect 8 percent of
which 2 percent would go to the state and 6 percent to Kodiak.
On January 1, 2012, the final year of the phase-in, when the
municipal limit is 4 percent in the summer months, the state
would collect 8 percent, keep 4 percent, and give Kodiak 4
percent. In the winter the state would give Kodiak 6 percent
and keep 2 percent.
Number 2319
REPRESENTATIVE WILSON asked if she understands this correctly.
In Kodiak's case the state will collect 8 percent, and give back
6 percent until the year 2010 at which time the state will
continue to collect 8 percent, but only return 5 percent to
Kodiak.
MR. PERSILY responded that Kodiak will get 5 percent in the
summer months, and 6 percent in the winter months when the
state's rate drops. Mr. Persily turned to Section 5, page 5,
which covers the same phase-in language for cities. It has the
same effect, one for boroughs, and one for cities.
Number 2417
REPRESENTATIVE GRUENBERG asked about unified municipalities.
MR. PERSILY responded that he is not sure whether unified
municipalities fall under boroughs or cities.
Number 2440
REPRESENTATIVE SEATON related that the community of Homer has a
3.5 percent [sales tax] while the borough has a 2 percent [sales
tax], and therefore the total sales tax is 5.5 percent. Which
entity loses money, he asked.
MR. PERSILY responded that since both the borough and city fall
under the [8 percent cap], the state would lose out on
collections while the city and borough would receive the full
amount.
Number 2559
MR. PERSILY pointed out that Sections 6-8 deal with motor fuel
tax change.
REPRESENTATIVE GRUENBERG noted that Sections 6 and 7 refer to 20
cents per gallon and Section 8 refers to 18 cents per gallon.
He asked why there is a difference in [the motor fuel] tax.
MS. WILSON replied that Section 8 addresses the fuel used on
highways. Currently, an individual would pay [a tax of] 8 cents
a gallon on fuel. If the fuel is used off-road, that individual
would be entitled to a 6-cent refund, which means 2 cents would
be paid. This bill does not change taxation of net fuel used
off-road, so an individual would pay 20 cents for that gallon of
fuel and then be refunded 18 cents. This section is a refund
provision which maintains the status quo under which 2 cents per
gallon is paid for off-road use.
Number 2746
REPRESENTATIVE GRUENBERG commented that there is an increase of
12 cents per gallon.
MS. WILSON replied that is correct. The fuel used on the
highway is increased by 12 cents per gallon. To keep status quo
on the off-road highway use, the refund is increased which keeps
the fuel tax at 2 cents per gallon.
REPRESENTATIVE WEYHRAUCH commented that many people pull their
boats or RVs to the gas station, and fill-up both tanks at same
time. He said he is pretty sure that most people do not apply
for a refund even though these are off-road vehicles.
Number 2853
MS. WILSON told the members that a boat is considered "marine
use" and is in a separate section, so it is not consider off-
road for state purposes. She agreed that it is true that
refunds are available for off-road vehicles by submitting a form
and receipt for purchase of the fuel to the state.
Number 2905
REPRESENTATIVE OGG asked if this section delineates that the
state will be the collector of sales tax.
MR. PERSILY, in response to Representative Ogg, said that the
state would administer, collect, enforce, audit, and send the
checks to the communities where the state has collected on
behalf of that community.
Number 2940
REPRESENTATIVE OGG suggested that there may be [some economic
advantage] by using tax collection systems that cities already
have in place and suggested some flexibility be written into the
legislation. Cities may be better at tax collection due to the
fact that they know the people and the system is already in
place. He reiterated that he believes it would be beneficial to
allow the state to use the existing municipal tax structure to
collect the sales tax.
MR. PERSILY pointed out that this bill would bring Alaska into
compliance with the Streamlined Sales Tax Project, which is a
nationwide effort. This compliance would allow the state to
obtain sales tax from the Internet purchases, mail orders, and
catalog sales if Congress changes the law. This will be worth a
lot in future. One of the requirements of [compliance] is that
the state be the administrator of the sales tax. The idea is
that businesses would send one check to the state rather than to
many different local jurisdictions. Although this would not
stop the state from working on contract or some other agreement
with local municipalities to assist in enforcement work, in
order to comply with the Streamlined Sales Tax Project the state
must be the central administration point.
Number 3143
REPRESENTATIVE OGG replied that is exactly his point; if the
state is the central administration point why not give the state
the option of allowing a city to be agent. The city as the
agent would not mean that sovereignty of collecting the tax
would passes to the municipality, but it could allow for tax
collection locally. If this would save money and collect more
taxes, he said he believes it would be a viable option.
MS. WILSON explained that this is an effort to maintain
simplicity for businesses, particularly for businesses that have
commerce in multiple locations. The goal is for that business
to write one check. For instance, a company could contact the
state and ask for the sales tax rate for a particular zip code.
This would enable businesses to rely on the state to advise them
when there is a change in the rate. Ms. Wilson said that to the
extent that arrangement is not threatened, a contract
arrangement would not be a problem. The overall goal is to keep
it simple for businesses and not to have, for example, 10 audit
teams coming in to audit a business for 10 different localities.
Only the state would do the audit; however, there would be
nothing to prevent the state from contracting with a city to
perform an audit.
Number 3410
REPRESENTATIVE GRUENBERG referred to Section 7, page 7, and
asked why the legislature would increase the tax on motor
vehicle fuel when there is no increase on aviation gas,
watercraft fuel, and aviation jet fuel.
MR. PERSILY responded that was a decision made by the
administration. He pointed out that in Alaska's case the motor
fuel tax rate is the lowest in the nation and has not increased
in over 30 years. Mr. Persily commented that those facts
entered greatly into the decision.
Number 3450
REPRESENTATIVE GRUENBERG asked how aviation gas, watercraft
fuel, and aviation jet fuel rates compare with the rates in
other states.
MR. PERSILY commented that he could get that information. He
said the collections on aviation gas, watercraft fuel, and
aviation jet fuel is not very significant. If this is an effort
to look for more revenues to pay for public services, there is a
lot more gas that goes into cars, pickup trucks, and SUVs.
Currently, there are exemptions written into state statutes for
the cargo business out of Anchorage airport, he added.
Number 3545
REPRESENTATIVE GRUENBERG questioned [why] this exemption [for
cargo] is in state statute and is letting huge planes go through
Alaska and not raising taxes at all.
MR. PERSILY responded that the decision [to provide these
exemptions] was made by the legislature some years ago as an
incentive to help build the international cargo business in
Alaska.
Number 3621
REPRESENTATIVE ROKEBERG commented that it is a very complex
issue, and not merely an incentive [to the international cargo
business].
CO-CHAIR WHITAKER pointed out that this is not such a complex
issue that an answer to Representative Gruenberg's question
cannot be obtained. He told Representative Gruenberg that an
answer to his question would be provided.
Number 3652
MR. PERSILY explained that in Section 9, page 9, Chapter 44, is
the sales and use tax language and most of the language deals
with the mechanics of collecting and administering the tax.
Page 9, line 21, covers the state portion of the tax, 2 percent
in the winter and 4 percent in the summer, and explains that the
amount is decreased based on what the city or borough tax may
be. Mr. Persily pointed to one provision on page 10, line 22,
which requires that the sales and use tax must be stated
separately on the sales so the purchaser knows the amount of the
tax and the amount of the goods. On page 11, line 3; he
explained that "Nexus" means to the full extent under federal
law and the U.S. Constitution. Therefore, if an entity has a
nexus or any connection with the State of Alaska, a sales and
use tax can be collected.
Number 3829
REPRESENTATIVE GRUENBERG offered a technical amendment, on page
11, line 5, insert the word "a" before the words "nexus with the
State of Alaska". There being no objection, the technical
amendment was adopted.
REPRESENTATIVE WILSON asked for an example of someone with a
nexus with the State of Alaska.
MS. WILSON posed an example in which a catalog company buys
products. If the aforementioned company has no presence or
connection in the state of Alaska, [the consumer] would be
responsible for the use tax. If, however, that catalog company
had an office or some a physical presence in the state, then
that catalog company would have to collect the tax.
Number 3927
REPRESENTATIVE GRUENBERG pointed out that the language on page
10, lines 27-28, AS 43.44.040(c), impinges on free speech in a
commercial context and the ability to contract. He asked why
the state has such an overriding interest in imposing such a
prohibition.
MS. WILSON replied that she is not an attorney; however, she
related that most states have this provision. The goal of the
provision is to ensure that all businesses are on a level
playing field, so that there is not one retailer advertising
that it will absorb the tax.
REPRESENTATIVE GRUENBERG asked if anyone has checked to see if
this provision [is allowable under the constitution].
Number 4028
CO-CHAIR WHITAKER replied that he would guess that it has not
been checked. He told Representative Gruenberg that he is
making notes of questions that need to be answered and a written
opinion will be obtained from Legislative Legal and Research
Services.
Number 4044
MR. PERSILY referred to page 11, line 7, which deals with exempt
sales. This legislation includes a requirement for
certificates. If, for example, an individual is purchasing
something that is exempt from sales tax, an exemption
certificate would be presented to the business so the business
has some assurance that it is a nontaxable item. The department
shall provide these exemption certificates.
REPRESENTATIVE HEINZE commented that she feels very frustrated
that she did not have time to read the bill. The review of the
bill is going so fast, she said, that she does not fully
understand what the committee is doing.
Number 4214
MR. PERSILY referred to page 12, line 6, which deals with
exemptions. Line 6 explains that any sales to or by government
agencies, whether federal, state, or municipal, would be exempt
from sales tax. Subsection (b) on page [12] makes it clear that
utilities are not exempt from the sales and use tax, he said.
MS. WILSON pointed out that page 12, lines 11-12, clarifies that
that although government entities are exempt, that exemption
does not include utilities that might be provided by a city or
governmental entity.
Number 4411
MR. PERSILY further clarified that if there is a municipally
operated utility that sells services to residents or businesses,
those services are subject to a sales tax as opposed to the
government, for example, selling land, which would be exempt.
In response to Representative Wilson, Mr. Persily pointed out
that the City of Wrangell provides utilities and charges a sales
tax on those utilities. That practice would continue under this
legislation, he said. Mr. Persily explained that although
subsection (a) on page 12, line 6, specifies that government
sales are exempt from sales tax, that exemption does not apply
to utility services provided by government.
Number 4506
MR. PERSILY addressed page 12, line 13, regarding sales to or by
501(c)(3) corporations. That language specifies that sales to
or by the IRS are exempt from the tax. Mr. Persily clarified
that this is about charitable organizations. Although there are
other IRS tax-exempt organizations, a 501(c)(3) is the IRS'
designation for charitable organizations.
Number 4604
REPRESENTATIVE GRUENBERG directed attention to page 12, line 9,
where it refers to federally recognized tribes and asked if that
would include all Native organizations.
MS. WILSON responded that there is a list of federally
recognized tribes.
MR. PERSILY added that the federally recognized list does not
include regional Native corporations.
TAPE 03-25, SIDE B
Number 4648
REPRESENTATIVE WEYHRAUCH agreed that the federally recognized
tribe list does not include regional corporations.
Number 4631
MR. PERSILY reviewed exemptions from the sales tax starting on
page 12, line 17, which provides that purchases made under the
food stamp program or WIC program are exempt; line 23 provides
that wages, salaries, and commissions are exempt; line 27
provides that insurance premiums are exempt; line 31 provides
that dividends and interest are exempt; and page 13, line 5
provides that garage sales or isolated or occasional sales, and
fundraising by nonprofit groups that may not be a 501(c)(3) are
also exempt.
Number 4500
REPRESENTATIVE SEATON asked why proceeds from the sales of
stocks, bonds, or securities are exempt.
MR. PERSILY said there would be very tough administrative
problems with [taxing stocks, bonds, or securities]. For
example, would the sales tax be on gross proceeds of the sale or
just on the profit. Furthermore, if an individual lost money on
the sale, would the state want to send back some sales tax on
the amount the individual lost.
Number 4417
MS. WILSON replied that traditionally sales tax has been applied
to tangible personal property. This legislation is a broader
bill and direction was given to exempt those items.
REPRESENTATIVE GRUENBERG commented that he can see why the state
might not want to tax a citizen who sold stock. He asked if
that would also apply to the purchase of the stock.
MR. PERSILY restated Representative Gruenberg's question by
using the example of an individual who buys stock from Merrill
Lynch. Does Merrill Lynch charge that individual sales tax on
the purchase of the stock, he asked.
MS. WILSON replied that the bill taxes sales of tangible
personal property and services; stock is intangible so it falls
outside the prevue of this bill.
Number 4255
REPRESENTATIVE GRUENBERG asked if he is correct in saying that a
copy write or a patent purchase is not taxable.
MS. WILSON responded that is correct.
Number 4228
MR. PERSILY explained that normally a sales and use tax deals
with tangible personal property; those items Representative
Gruenberg mentioned are intangible. He added that he is not
aware of a constitutional prohibition against a sales and use
tax on an intangible item, but it would put Alaska at the
leading edge in finding things on which to assess a sales tax.
REPRESENTATIVE SEATON asked if fishing permits would be
nontaxable.
MS. WILSON replied that is correct; it is an intangible asset.
MR. PERSILY referred to page 13, line 13, which deals with
household effects brought into Alaska and noted that these items
would not be taxed.
Number 4136
REPRESENTATIVE MOSES inquired as to whether the tax would apply
to construction camps where there are bunkhouses and mess halls.
MS. WILSON responded that real property is not being taxed.
However, there is no exemption provided for meals, services, and
lodging. If these meals and services are being sold there is no
exemption, and therefore, they would be taxable.
MR. PERSILY posed an example in which an individual contracted
with a company to provide meal services to his/her work crew at
a construction or fish site. The amount of money under that
contract would be subject to taxation under this legislation.
REPRESENTATIVE MOSES commented that [in many cases] it is in
lieu of wages.
MR. PERSILY replied that an argument could be made that a
portion of all purchases goes to wages of someone who provided
the service or someone who built the product. This is much like
a sales tax that would have to be paid to an accountant to do a
tax return, or to a mechanic who fixes your car, or to a company
that provides meal services at the work site; they are services
and would be taxed.
Number 3940
MS. WILSON commented that in this situation, the business is in
effect the consumer of the service. Although the benefit is
passed on to the employees, the business is the consumer of the
meal service.
REPRESENTATIVE MOSES stated that he needs more clarity on this.
On the North Slope [these companies] should be taxed. [There
are employees] eating in mess halls or being provided lodging
and not being charged. He stated he believes it is essential
[that it be subject to sales and use tax].
MR. PERSILY posed an example in which an individual is operating
a business on the North Slope and contracts with someone to
provide meal service to the company's workers. That individual
would have to pay sales tax on that service that was purchased.
If the business is providing meals and lodging to the workers at
no charge, as Representative Moses mentioned, there is no
taxable transaction there. There is no tax charged to those
workers because they did not purchase services or goods.
Number 3800
REPRESENTATIVE OGG asked about the exemption for occasional
sales. He asked about the language that refers to "other than a
vehicle" and asked how that applies to a rowboat or sailboat.
Would such items be taxed, he asked.
MS. WILSON agreed that there needs to be some clarification in
reference to the term "vehicle." The intent of this section is
to not tax garage sales, for example; however, if an individual
sells a car every five years that should be taxable. Ms. Wilson
reiterated that the language could use some clarification either
through statute or regulation.
Number 3643
CO-CHAIR WHITAKER agreed with Ms. Wilson that there is need for
clarification; however, he said he would be concerned if that
clarification were to be done through regulations because this
is quite a substantial issue.
Number 3635
MR. PERSILY referred to page 13, line 18, where there is a cap
on motor vehicles, watercrafts, aircrafts, and mobile homes,
regardless of the purchase price of those items. A sales tax
would be charged up to the first $5,000 of the price. For
example, if there were an 8 percent sales tax and an individual
bought a $30,000 car, sales tax would only be charged on the
first $5,000.
REPRESENTATIVE WILSON asked if the sales tax would be collected
when [the buyer] changes the registration.
MR. PERSILY said that is correct.
[HB 293 was held over.]
ADJOURNMENT
Number 2321
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
6:00 p.m.
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