Legislature(2023 - 2024)SENATE FINANCE 532
04/17/2023 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB122 | |
| SB34 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 34 | TELECONFERENCED | |
| *+ | SB 122 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
April 17, 2023
1:35 p.m.
1:35:04 PM
CALL TO ORDER
Co-Chair Olson called the Senate Finance Committee meeting
to order at 1:35 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
MEMBERS ABSENT
Senator David Wilson
ALSO PRESENT
Senator Bill Wielechowski, Sponsor; David Dunsmore, Staff,
Senator Bill Wielechowski; Senator James Kaufman, Sponsor;
Emma Torkelson, Staff, Senator Kaufman; Kris Curtis,
Auditor, Legislative Audit; Ashlee Adoko, Executive
Director, Office of Project Management and Permitting,
Department of Natural Resources.
PRESENT VIA TELECONFERENCE
Brandon Spanos, Deputy Director, Tax Division, Department
of Revenue, Anchorage; Tina Cunning, Alaska National
Interest Lands Conservation Act (ANILCA), Anchorage; Stan
Leaphart, Former Executive Director, Citizens Advisory
Commission on Federal Areas (CACFA), Anchorage.
SUMMARY
SB 34 CITIZEN ADVISORY COMM ON FEDERAL AREAS
SB 34 was HEARD and HELD in committee for further
consideration.
SB 122 APPORTION TAXABLE INCOME; DIGITAL BUSINESS
SB 122 was HEARD and HELD in committee for
further consideration.
SENATE BILL NO. 122
"An Act relating to the Multistate Tax Compact;
relating to apportionment of income to the state;
relating to highly digitized businesses subject to the
Alaska Net Income Tax Act; and providing for an
effective date."
1:35:11 PM
SENATOR BILL WIELECHOWSKI, SPONSOR, introduced the
legislation. He referenced the Sponsor Statement (copy on
file):
Senate Bill 122 modernizes Alaska's corporate income
tax laws to address the realities of the digital
economy by making two reforms to Alaska's tax
apportionment system. This bill adopts market-based
sourcing for calculating the portion of a taxpayer's
sales that are subject to Alaska's corporate income
tax and adopts a single sales factor for calculating
the taxable income of highly digitized businesses. SB
122 does not make any changes to Alaska's corporate
income tax rates or brackets.
Under the Commerce Clause of the U.S. Constitution,
states may only tax activity that is reasonably
attributable to that state. For taxpayers who operate
in multiple states, it is necessary to determine what
portion of a taxpayer's sales are subject to being
taxed by Alaska. Traditionally, most states have used
a three-factor formula for income tax apportionment
where the percentage of the taxpayer's sales that take
place in the state, the percentage of a taxpayer's
property located in the state, and the percentage of a
taxpayer's payroll in a state are used to determine
how much of a taxpayer's income can be taxed by that
state.
Market-Based Sourcing
SB 122 amends Alaska's codification of the Multistate
Tax Compact (MTC) to clarify that sales of goods and
services in Alaska or delivered to Alaskan customers
are properly considered to be Alaskan sales. Alaska is
a member of the MTC, which is an advisory compact that
recommends model legislation to facilitate uniform tax
apportionment and filings. The 6th Alaska State
Legislature codified the MTC in Alaska Statutes in
1970, and they could not have anticipated how to
properly apportion sales from online businesses.
Currently the source of sales is determined using a
methodology known as "cost of performance" that allows
out-of-state corporations to argue that online sales
occur in the state where the business is based and are
thus not subject to Alaska's corporate income tax.
Under market-based sourcing, sales would be
apportioned to Alaska if the market for the sale was
in Alaska. Sales of any tangible property in Alaska
will be considered to be an Alaska sale and sales of
intangible property and services will be considered
Alaska sales if they are used in the state or
delivered to a location in the state.
Single Sales Factor for Online Businesses
The three-factor formula was designed for a brick-and-
mortar world and does not properly reflect online
sales made in Alaska. SB 122 would apportion income
from highly digitized businesses based on the sales
factor alone, to ensure that income earned in Alaska
is subject to Alaska's corporate income tax.
Through the internet, companies can offer goods and
services for sale in Alaska without maintaining any
property or employees in the state. Online businesses
can target advertising to Alaskans; make sales and
deliver electronic products through Alaska's broadband
infrastructure; and ship products through Alaska's
roads, ports, and airports all without having any
payroll or property in the state. In fact, the three-
factor formula disincentives high-tech companies from
opening facilities in Alaska because having payroll or
property here would increase their taxes.
The single sales factor will apply to corporations
that makes at least 50 percent of their Alaska sales
through electronic means or sales of services related
to computer or Internet technologies.
The traditional three-factor formula will remain in
place for brick-and-mortar businesses. Alaska has
previously adopted alternative tax apportionment
systems for industries, such as the oil and gas
industry, where the three-factor formula has been
found to not be appropriate.
These reforms will have little, if any, effect on
consumer prices for Alaskans. Online businesses
usually set their prices at the national level and
both market-based sourcing and single sales factor
apportionment are increasingly common across the
country. At least 36 states have adopted some form of
market-based sourcing and at least 37 states have
adopted a single sales factor for at least some
industries.
When the 6th Alaska State Legislature adopted the
current system for tax apportionment in 1970, they
could not have imagined how the internet would allow
businesses to operate in Alaska without any property
or payroll in the state. SB 122 makes common sense
amendments to bring Alaska's tax apportionment system
into the 21st century.
1:39:41 PM
DAVID DUNSMORE, STAFF, SENATOR BILL WIELECHOWSKI,
discussed, "SB 122 Corporate Income Tax Modernization"
(copy on file). He addressed slide 4:
Under the Commerce Clause of the U.S. constitution,
states may only tax activity that is reasonably
attributable to that state.
For taxpayers who operate in multiple states, it is
necessary to determine what portion of their income
can be
taxed by each state.
To avoid taxpayers having to do separate accounting in
each state, states have adopted mathematical formulas
to determine tax apportionment.
Mr. Dunsmore pointed to slide 5:
The U.S. Supreme Court has ruled that states must use
"fair apportionment" to determine what is taxable by
their state, requiring the system be internally and
externally consistent.
Internal consistency:
If all states used the same system, there would be no
double taxation.
External consistency:
That the value taxed is "fairly attributable" to the
state.
Mr. Dunsmore addressed slide 6:
Traditionally states have used an equally weighted
three-factor formula for tax apportionment
Sales Factor: The percentage of a taxpayer's sales
that are made in the state
Property Factor: The percentage of a taxpayer's
property that is located in the state
Payroll Factor: The percentage of a taxpayer's payroll
that is made in the state
Mr. Dunsmore pointed to slide 7, "Alaska is a member of the
Multistate Tax Compact":
This is an advisory compact with 14 other states and
the District of Columbia that promotes uniformity in
tax apportionment and filing procedures.
The Commissioner of Revenue represents Alaska on the
commission that governs the compact.
The 6th Alaska State Legislature codified the compact
in Alaska Statutes in 1970 as AS 43.19.010 which
establishes Alaska's tax apportionment laws.
The Legislature has not made any amendments to this
statutory language since then.
Mr. Dunsmore addressed slide 8, "The current apportionment
formula was designed for a brick and mortar world":
In the modern digital economy a corporation can target
advertising to Alaska, sell a product through Alaska's
broadband infrastructure, and ship it through Alaska's
roads, ports and airports without having any property
or payroll in Alaska.
SB 122 makes common sense reforms to ensure these
sales are properly apportioned to Alaska.
Mr. Dunsmore pointed to slide 11, "Currently Alaska uses a
methodology called "cost of performance" to determine
whether sales happened in Alaska":
Under cost of performance, a sale is considered to
happen in Alaska when "the income producing activity
is performed in this state."
This means that out of state corporations can argue
that online sales to Alaskans do not take place in
Alaska.
SB 122 replaces cost of performance with a "market
based" methodology where sales will be considered to
happen in Alaska when the market for the sales is in
Alaska.
Mr. Dunsmore pointed to slide 12:
Under market-based sourcing a sale occurs in Alaska
when
• For sales of real property when the property is
located in the state
• For tangible personal property, when the
property is located in the
state
• For services when the service is delivered in
the state
• For intangible property when it is used in the
state
Mr. Dunsmore looked at slide 13:
At least 36 other states already use some form of
market-based sourcing
Mr. Dunsmore addressed slide 15:
For highly digitized businesses only, the sales factor
would be the only factor used for tax apportionment.
Mr. Dunsmore pointed to slide 16:
A business would be considered highly digitized if 50%
or more of its Alaska sales are of:
• Intangible property delivered electronically
• Services delivered electronically
• Services related to computers, electronic
transmission, or internet technology
• Tangible property purchased through the
internet
Mr. Dunsmore looked at slide 17:
The three-factor formula will still be used for brick-
and-mortar businesses
Mr. Dunsmore addressed slide 18:
Alaska has previously adopted a different
apportionment formula for the oil and gas industry,
because the Legislature found that the traditional
formula did not fairly reflect their Alaska income.
Similarly, it is appropriate to use a different
formula for highly digitized businesses, because the
current formula does not fairly reflect Alaska sales.
1:45:07 PM
Mr. Dunsmore pointed to slide 19:
The current three-factor formula is a disincentive to
high-tech businesses opening Alaska facilities
Having payroll and property in Alaska can
significantly increase an online business' Alaska
taxes.
Adopting a single sales factor for this industry will
remove this disincentive and level the playing field
between out-of-state and Alaska businesses.
Mr. Dunsmore looked at slide 20:
At least 37 other states already use a single sales
factor for at least some industries
Mr. Dunsmore pointed to slide 21:
Jurisdictions Globally Are Facing Challenges
Determining How to Accurately Tax Digital Sales
"Through the use of remote technology, many
digitalized businesses can effectively be heavily
involved in the economic life of different
jurisdictions without any, or any significant physical
presence? One consequence of this development is that
a growing number of businesses may have an economic
presence in a jurisdiction without having a physical
presence."
Mr. Dunsmore discussed slide 22:
Market-Based Sourcing and Single Sales Factor Allow
States to Solve the Issues that Are Vexing
Jurisdictions Around the World
"State corporate income tax systems virtually alone
among national or subnational corporate income tax
systems in the world facilitate the taxation of
digital-only businesses
A large majority of states have enacted economic nexus
and market sourcing rules that are designed for and
adaptable to the emerging digital economy."
-Karl A. Frieden and Stephanie T. Do
Mr. Dunsmore pointed to slide 23:
These reforms would have little or no impact on
Alaskan consumers
Online businesses generally set their prices at
the national or global level.
Both market-based sourcing and single sales
factor are common features of tax apportionment
systems across the country.
This bill does not change the tax rates or
brackets at all, merely the formula for
determining what income is taxable in Alaska.
Co-Chair Olson wondered how the bill aligned with the other
states that have enacted similar legislation.
Mr. Dunsmore shared that there were reports in the
committee packet that showed the different formulas in the
other states. He stated that it was an increasingly common
practice.
Co-Chair Olson wondered whether the majority of states had
a similar structure for electronic sales.
Mr. Dunsmore replied that a majority of states had some
sort of market-based sourcing, and some form of single
sales factor. He stressed that each state had its own
unique tax structures.
Senator Kiehl remarked that an increasing number of large
corporations were delivering goods through the internet. He
wondered whether the bill had definitions that would cover
those services as provided in Alaska.
Mr. Dunsmore replied that the language was suggested by the
Department of Revenue (DOR) to address the concern of the
specific question.
1:50:39 PM
BRANDON SPANOS, DEPUTY DIRECTOR, TAX DIVISION, DEPARTMENT
OF REVENUE, ANCHORAGE (via teleconference), replied that
the sale was treated the same as whether the good was
tangible or intangible. He stated that the bill would
consider that sale as marketed to Alaska, therefore it
would be sourced to Alaska.
Senator Kiehl surmised that there would not be much change,
because the service would not be digitized.
Mr. Spanos replied that it would depend on the definition
of highly digitized or whether more than half the
transactions were digital in form.
Mr. Dunsmore discussed the Sectional Analysis (copy on
file):
Section 1 amends Alaska's codification of the
Multistate Tax Compact. In accordance with the Manual
of Legislative Drafting, the entire compact is
displayed in the bill although most portions are not
being amended.
• Articles I-III contain no amendments.
• Article IV contains amendments:
o Section 1 amends definitions:
? Subsection (a) provides a definition
of "apportionable income" which
replaces the current definition of
"business income."
? Subsection (e) replaces the existing
term "nonbusiness income" with "non-
apportionable income."
? Subsection (g) clarifies the
definition of "sales."
o Section 4 contains a conforming amendment
replacing the word "nonbusiness" with "non-
apportionable."
o Section 9 contains a conforming amendment
replacing the word "business" with
"apportionable."
o Section 17 is amended to adopted market
based sourcing for calculating a taxpayer's
sales.
? Subsection (a) states that sales are
considered to be in the state if the
taxpayer's market for sales is in the
state.
• Paragraph 1 states that the market
for transactions relating to real
property is in the state if the
property is in the state.
• Paragraph 2 states that the market
for transactions relating to tangible
personal property is in the state if
the property is in the state.
• Paragraph 3 states that the market
for the sales of service is in the
state if the service is delivered to a
location in the state.
• Paragraph provides for how the market
for sales is determined for intangible
property.
o Subparagraph (i) provides that the market
for rented, leased, or licensed intangible
property sales are in the state if it is
purchased by a consumer in the state.
o Subparagraph (ii) that when intangible
property is sold, the market is considered
to be in the state if the property is used
in the state.
• Paragraph (b) provides that if the
state of assignment for a sale cannot
be determined, it shall be reasonably
approximated.
• Paragraph (c) states that when a
taxpayer is not taxable in a state to
which sales would be assigned by this
section, that they shall be excluded
from the denominator of the sales
factor.
• Paragraph (d) authorizes the tax
administrator (the Department of
Revenue for Alaska) to adopt
regulations to implement this section.
• Articles V-XII contain no amendments.
Section 2 is a conforming section, replacing the word
"business" with "apportionable."
Section 3 is a conforming section, replacing the word
"business" with "apportionable."
Section 4 is a conforming section, replacing the word
"business" with "apportionable."
Section 5 is a conforming section, replacing the word
"business" with "apportionable."
Section 6 is a conforming section referencing the
provisions concerning highly digitized businesses in
Section 7.
Section 7 provides that a single sales factor shall be
used for tax apportionment for highly digitized
businesses.
• Subsection (a) states that tax apportionment
for highly digitized businesses shall be done in
accordance with Alaska's codification of the
Multistate Tax Compact except as modified by this
section to use a single sales factor.
• Subsection (b) states that only the sales
factor shall be used for apportionment for highly
digitized businesses.
• Subsection (c) defines "highly digitized
business."
• Subsection (d) allows the Department of Revenue
to require a taxpayer to apportion their income
in accordance with this section if the Department
determines that they are a highly digitized
business.
• Subsection (e) provides definition of
"delivered," "electronic transmission,"
"intangible property," and "Internet sales."
Section 8 is a transition section providing that the
single sales factor for highly digitized businesses
only applies for tax years beginning January 1, 2024
or later.
Section 9 provides an effective date of January 1,
2024.
1:57:36 PM
Mr. Spanos discussed the indeterminate fiscal note.
Co-Chair Olson asked for more specifics of the upper end or
lower end.
Mr. Spanos replied that it was difficult to determine a
specific number, but felt that it would be the lower end.
Co-Chair Olson OPENED and CLOSED public testimony.
SB 122 was HEARD and HELD in committee for further
consideration.
SENATE BILL NO. 34
"An Act reestablishing the Citizens' Advisory
Commission on Federal Management Areas in Alaska; and
providing for an effective date."
2:02:48 PM
SENATOR JAMES KAUFMAN, SPONSOR, explained the legislation.
He addressed the Sponsor Statement (copy on file):
SB 34 reestablishes the Citizens' Advisory Commission
on Federal Management Areas in Alaska (CACFA) which
sunset in 2021 and sets a new sunset date of June 30,
2031. The Commission is made up of 10 public members,
one Senator, and one Representative who represent "the
diversity of users and uses of federal land in the
state" and are appointed by the Governor and
Legislature.
CACFA was first established in 1981, shortly after
Congress passed the Alaska National Interest Lands
Conservation Act (ANILCA)comprehensive legislation
governing all federal public lands in the state.
Under the balanced compromise Congress crafted in
ANILCA, 104+ million acres (nearly a quarter of the
state) were set-aside in permanent federal ownership
as conservation system units (e.g., parks, preserves,
wildlife refuges, wilderness areas) while at the same
time creating unique provisions enabling Alaskan's to
maintain their traditions, accommodate the social and
economic needs of the state, provide a range of land-
use and land access rights, safeguard opportunities
for responsible resource development, and facilitate
continued improvements in transportation and utility
infrastructure.
Factoring in the provisions of the Alaska Statehood
Act and the Alaska Native Claims Settlement Act, most
Alaskans are regulated under a unique and extremely
complex regulatory web.
CACFA was an independent and impartial source of
information and center for advocacy on Statehood,
ANCSA, and ANILCA issues that impact all Alaskans.
When active, CACFA helps Alaskans navigate complex
regulations and to works with federal agencies to
ensure Congressional intent is implemented with
respect to Alaska's interests. Among many things, the
Commission holds hearings to collect public comment on
decisions that affect them; disseminates information
about historical and new regulation to the public, the
Executive branch, and the Legislature; regularly
submits written comment in response to federal
requests; and helps Alaskans navigate federal
permitting processes. While the State's ANILCA program
and CACFA both monitor federal actions, CACFA does so
on behalf of individual Alaskans, whereas the State
can only focus on issues with state-level impact.
As time passes, institutional memory and ANILCA
expertise is lost at both the federal and state level.
An active CACFA would ensure that this critical
knowledge is preserved and remains accessible to
Alaskans. Until CACFA is reestablished, individuals,
organizations, and the Legislature have no independent
source of ANILCA expertise. Furthermore, there is no
organized center for which individuals can channel
their concerns to higher levels of government making
decisions that impact them. CACFA is an essential tool
to ensure that Alaskans have a strong and powerful
voice in what happens across our state
2:06:09 PM
EMMA TORKELSON, STAFF, SENATOR KAUFMAN, addressed the
Sectional Analysis (copy on file):
Sec 1. Amends AS 44.66.010(a) creating new
subsection (15) reestablishing the Citizens Advisory
Commission on Federal Management Areas in Alaska,
setting a new sunset date of June 30, 2031.
Sec 2. Technical Change: Amends AS 44.66.010(a) to
remove subsection (10) where CACFA's previous sunset
date (June 30, 2021) was listed.
Sec 3. Incorporates transition language to the
uncodified law of Alaska establishing the initial term
lengths of new appointments to the commission.
Thereafter, the term limits outlined in the
Commission's statute will take effect.
Sec 4. Sets an effective date of July 1, 2023.
2:07:23 PM
KRIS CURTIS, AUDITOR, LEGISLATIVE AUDIT, explained the
audit (copy on file). She stated that the audit concluded
that the commission was operating effectively.
2:08:46 PM
TINA CUNNING, ALASKA NATIONAL INTEREST LANDS CONSERVATION
ACT (ANILCA), ANCHORAGE (via teleconference), spoke in
support of the bill. She explained some history of ANILCA,
and the impact on various parts of Alaska.
2:13:19 PM
STAN LEAPHART, FORMER EXECUTIVE DIRECTOR, CITIZENS ADVISORY
COMMISSION ON FEDERAL AREAS (CACFA), ANCHORAGE (via
teleconference), stated that he was available for
questions, and felt that the commission was effective,
because of the work with the public to resolve some
conflicts.
Co-Chair Olson queried the reason for the sunset in 2021.
Mr. Leaphart did not respond.
2:15:12 PM
ASHLEE ADOKO, EXECUTIVE DIRECTOR, OFFICE OF PROJECT
MANAGMEENT AND PERMITTING, DEPARTMENT OF NATURAL RESOURCES,
explained the fiscal note.
Co-Chair Olson OPENED and CLOSED public testimony.
Senator Kaufman thanked the committee.
SB 34 was HEARD and HELD in committee for further
consideration.
Co-Chair Olson discussed the upcoming committee meeting
schedule.
ADJOURNMENT
2:16:31 PM
The meeting was adjourned at 2:17 p.m.