Legislature(2007 - 2008)BUTROVICH 205
10/29/2007 09:30 AM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| SB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE JUDICIARY STANDING COMMITTEE
October 29, 2007
9:38 a.m.
MEMBERS PRESENT
Senator Hollis French, Chair
Senator Charlie Huggins, Vice Chair
Senator Bill Wielechowski
Senator Gene Therriault
MEMBERS ABSENT
Senator Lesil McGuire
COMMITTEE CALENDAR
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (S) READ THE FIRST TIME - REFERRALS
10/18/07 (S) RES, JUD, FIN
10/19/07 (S) RES AT 9:00 AM BUTROVICH 205
10/19/07 (S) Heard & Held
10/19/07 (S) MINUTE(RES)
10/20/07 (S) RES AT 8:00 AM BUTROVICH 205
10/20/07 (S) Heard & Held
10/20/07 (S) MINUTE(RES)
10/21/07 (S) RES AT 1:00 PM HOUSE FINANCE 519
10/21/07 (S) Heard & Held
10/21/07 (S) MINUTE(RES)
10/22/07 (S) RES AT 11:30 AM BUTROVICH 205
10/22/07 (S) Heard & Held
10/22/07 (S) MINUTE(RES)
10/23/07 (S) RES AT 9:00 AM BUTROVICH 205
10/23/07 (S) Heard & Held
10/23/07 (S) MINUTE(RES)
10/24/07 (S) RES AT 10:00 AM BUTROVICH 205
10/24/07 (S) Heard & Held
10/24/07 (S) MINUTE(RES)
10/25/07 (S) RES AT 10:00 AM BUTROVICH 205
10/25/07 (S) Heard & Held
10/25/07 (S) MINUTE(RES)
10/26/07 (S) RES AT 1:30 PM BUTROVICH 205
10/26/07 (S) Heard & Held
10/26/07 (S) MINUTE(RES)
10/27/07 (S) RES AT 9:00 AM BUTROVICH 205
10/27/07 (S) Moved CSSB2001(RES) Out of Committee
10/27/07 (S) MINUTE(RES)
10/28/07 (S) RES AT 0:00 AM BUTROVICH 205
10/28/07 (S) -- MEETING CANCELED --
10/29/07 (S) JUD AT 9:00 AM BUTROVICH 205
WITNESS REGISTER
MARCIA DAVIS, Deputy Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding SB 2001.
JONATHAN IVERSEN, Director
Tax Division
Department of Revenue (DOR)
POSITION STATEMENT: Answered questions regarding SB 2001.
ROBERT MINTZ, Consulting Attorney for the Administration
Kirkpatrick & Lockhart Preston Gates Ellis LLP (K&L Gates)
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding SB 2001.
KEVIN BROOKS, Deputy Commissioner
Department of Administration (DOA)
Juneau, Alaska
POSITION STATEMENT: Answered questions regarding auditor
requests in SB 2001.
NIKKI NEAL, Director
Division of Personnel and Labor Relations
Department of Administration
Juneau, Alaska
POSITION STATEMENT: Defined classified and exempt employment.
JAN DEYOUNG, Attorney
Department of Law
Anchorage, Alaska
POSITION STATEMENT: Answered questions about exempt employees.
JIM DUNCAN, Business Manager,
Alaska State Employees Association--Local 52 (ASEA)
Juneau, Alaska
POSITION STATEMENT: Supported hiring classified employees for
oil and gas revenue auditor positions in SB 2001.
BRUCE LUDWIG, Business Manager
Alaska Public Employees Association/AFT
Juneau, Alaska
POSITION STATEMENT: Supported using classified employees.
MARILYN CROCKET, Executive Director
Alaska Oil and Gas Association (AOGA)
Anchorage Alaska
POSITION STATEMENT: Introduced Tom Williams.
TOM WILLIAMS, Senior Royalty and Tax Council
BP Exploration-Alaska, Inc.
Chair of the AOGA tax committee
Anchorage Alaska
POSITION STATEMENT: Spoke in opposition to SB 2001.
MICHAEL HURLEY, Director
Government Relations
ConocoPhillips
Anchorage, Alaska
POSITION STATEMENT: Spoke in opposition to SB 2001.
ACTION NARRATIVE
CHAIR HOLLIS FRENCH called the Senate Judiciary Standing
Committee meeting to order at 9:38:48 AM. Present at the call to
order were Senators Huggins, Therriault, and French. Senator
Wielechowski arrived later.
SB2001-OIL & GAS TAX AMENDMENTS
9:39:08 AM
CHAIR FRENCH announced the consideration of SB 2001. Before the
committee was CSSB 2001(RES), labeled 25-GS0014\M. The plan is
to get an overview and walk through a series of legal questions.
On Wednesday there will be a discussion of net versus gross
taxation. Today the committee will begin to discuss penalties;
the legality of penalties; information sharing; Qui Tam (whistle
blower); statute of limitations; retroactivity of certain
aspects of the bill, including corrosion; duration of lawsuits
and settlements of a net-based system whereby the public has
expressed concern; and any other legal questions.
CHAIR FRENCH recognized Senate President Green and Senator
Hoffman.
9:41:45 AM
MARCIA DAVIS, Deputy Commissioner, Department of Revenue (DOR),
said she did a topical analysis of ACES [Alaska's Clear and
Equitable Share] in the resources committee. There is now
version "E", which has portions of the bill deferred for later
consideration.
CHAIR FRENCH said a topical presentation of the bill as
initially presented would be best.
9:43:30 AM
SENATOR THERRIAULT said he reviewed the bill and legal memo. "It
appeared that there were a lot of sections that were deleted,
sort of conforming because a previous section had dropped out.
But I wasn't sure that I was able to track all of those, and so
the global discussion would be good for me too."
MS. DAVIS said she can note what language has remained in Senate
version "E".
CHAIR FRENCH said time is short and his intention is to move the
bill this week. Public testimony will be more limited and will
probably occur at the end of each day. It will be truncated,
however, so the bill can be moved. He said he's a firm believer
that there are two sides of each question.
9:45:32 AM
MS. DAVIS said Robert Mintz is on the line, and he helped
prepare the topical overview.
9:46:11 AM
ROBERT MINTZ, Attorney, Kirkpatrick & Lockhart Preston Gates
Ellis LLP (K&L Gates), said he has been working with DOR and the
Department of Law (DOL) drafting production tax legislation. The
oil and gas production tax has been in Alaska law since before
statehood. That revenue is in addition to royalties on state
lands, property tax, and corporate income tax. A production tax
typically applies a tax rate to some measure of the value of oil
and gas that is produced. He said to keep in mind it is
exercising the state's taxing power and, unlike royalties, it
applies to production from private, federal, and state lands.
9:48:42 AM
MR. MINTZ referred to slide 3, "Core Provisions of HB 3001
(enacted in 2006)". Section 011 levies the tax on oil and gas
based on a percentage of value. Section 160 helps calculate the
taxable value of oil and gas-the production tax value. "Think of
it as the net value," he said. An important part of that
calculation is the deduction of the upstream costs, defined in
Sections 165 and 170. Another change from that law was to
establish new tax credits. Unlike previous production tax laws,
it provides for an annual tax with an annual return, and it also
provides for monthly estimated installment payments.
9:50:40 AM
MR. MINTZ said he will now speak of the core provisions of the
Governor's bill and how those would change current law. Slide 8
refers to Section 15, which is not in the committee substitute
(CS). It levies a tax on the producer that is equal to the
production tax value of oil and gas multiplied by the tax rate.
Subsection (g) gives the tax rate two components: a base rate of
25 percent plus a progressivity tax rate, but the term
'progressivity' is not in the bill. That rate is an additional
1/5 of a percentage point for every dollar per barrel over a $30
net value. The current law provides for a slightly steeper slope
of 1/4 of a percentage for each dollar per barrel.
Progressivity currently kicks in at $40 per barrel, but the
governor's will kick in at $30. Currently, progressivity is
calculated monthly and it's annual under the governor's
proposal.
9:52:57 AM
CHAIR FRENCH clarified that version \M is before the committee
and the provisions being discussed were in the original bill
submitted by the governor. He asked how the drafters came to the
trigger value of $30 versus $40.
JONATHAN IVERSEN, Director, Tax Division, Department of Revenue
(DOR), said starting the progressivity at a lower amount was
made to capture "situations in which there are-where you're
driving down production tax values. You've got a higher cost
that would drive down the net per barrel, so in a high-cost
environment, when you're at a $30 per barrel amount, that would
start the progressivity trigger at an earlier time, so it
captures more of that."
SENATOR THERRIAULT said, "So you've got a lower trigger … but
starting earlier than PPT [profits-based production tax of 2006-
current law]."
MS. DAVIS said costs are much higher than anticipated when PPT
was passed. "Previously it was thought because the costs were
lower … the value you look at to decide whether it's above or
below the trigger is the value at point of production and it's
the net value at the point of production. So you deduct
transportation costs, you get to the point of production and
then it's net, so you deduct the OPEX and CAPEX," which "drives
the number down, and then you look at that number. And the way
it was written in the … PPT; that number was $40, and what we
found is because the costs had gone up significantly, it was
going to take a West Coast price of approximately $62 before the
trigger-the progressivity price-would kick in. That was
approximately $10 higher than people had anticipated when they
originally passed PPT." The trigger price was moved to $30, so
it would work as originally intended, "because you're
subtracting a larger number at the point of production."
9:55:39 AM
SENATOR THERRIAULT asked what all was in play, and "what were
you trying to strike a balance with on the fiscal terms." He has
heard that part of decision of setting the tax and trigger was
based on the lower 10 percent gross floor.
MS. DAVIS said that was a good description. The administration
made a base tax rate of 25 percent to capture a larger share of
the revenue, and the progressivity trigger was changed to kick
in sooner. Based on the resulting net present value (npv) to
ongoing operations and new field developments in that climate,
the administration made an assessment of the npv of future
projects to see if it would impact future decisions. "We wanted
to compare what that resulting government take percentage would
be and compare that to what we thought were our peer group
comparison-Norway, UK, Gulf of Mexico, and Alberta, and make
sure we hadn't … increased the state's government take to a
point where it made us uncompetitive with other countries, in
terms of competing for investment dollars."
MS. DAVIS said the tax, progressivity, and 10 percent floor-
which were directed at legacy fields-made a need for a slightly
lower slope of recovery. So there is a 0.2 percent increase for
each dollar instead of 0.25 percent. "We flattened the curve
slightly in balance to keep the government take number in the
ball park; to keep the npv of future development projects we're
assessing in the range of positive, so it was a multifactor
calibration." Each factor played some role. "Any time you reach
in and take, say, a 10 percent floor out … then … the balance
there was, if the state was going to secure itself with a
minimum stream, it does impact … from an investment decision,
they have to evaluate the downside of being in a world where
you've got a minimum tax rate that's essentially set like a
gross, and it might be uneconomic at low prices, and … companies
are willing to take that risk if there's a more significant
upside. So that's when … we didn't push high if we had the
floor. But if the will of this body is to not have a floor, then
the option is now open to then-in countries around the world,
when they … return capital quickly, even at a low price, in a
low-risk environment, the countries generally feel more
comfortable taking a higher share of the upside. So once you
teeter it here, you actually have the option to teeter it up on
the upper end." She noted that the committee has a blank slate
because before it is the current PPT.
9:59:29 AM
CHAIR FRENCH asked if the progressivity of the current version
takes into account the high cost of developing heavy oil.
MS. DAVIS said the current progressivity trigger is still a net
number; therefore, the evaluation takes into account the costs
of a given barrel produced. Prudhoe oil has high margins of
profit compared with heavy Kuparuk oil, so the progressivity
would be triggered at different points.
CHAIR FRENCH asked if the high costs of developing heavy oil is
built into the base that rises before progressivity kicks in.
MS. DAVIS said yes.
Senator Thomas joined meeting.
SENATOR THERRIAULT said there is an idea that the state should
just get its take by adjusting progressivity instead of the
trade off between the progressivity percentage rate and the tax
rate. He asked how that would change the investment climate,
"because whatever the tax rate is, that's also the deduction
rate that the companies get." That isn't set by the
progressivity rate. "So you can reach out and grab more with a
higher tax rate, but that means you're going to also offer more
in the incentives through the deductions. If you reach out and
grab more through progressivity, you don't have an offset on the
investment side."
MS. DAVIS said that is an interesting aspect between the base
rate and progressivity rate. As the tax rate is raised,
ironically, it enhances the more expensive new field development
because it makes the credits have greater value because they
offset a higher tax.
CHAIR FRENCH said it is counterintuitive and is one of the
aspects of the net tax that the public doesn't get.
10:03:00 AM
MS. DAVIS explained that if the tax rate is 20 percent of
profits and $100 is spent and allowed to be deducted against
taxes, then when that $100 is deducted against taxes, there is a
20 percent or $20 savings. So, that capital was really $80. The
state has invested the $20. If the tax rate were 30 percent, the
calculation would be a $70/$30 split between the investor and
the state. "The irony is that in terms of their spend, which may
be the same thing, they get a greater uplift-a greater subsidy
of their costs, the higher the tax rate is."
CHAIR FRENCH asked if it is true with or without a credit, or is
it the credit that really makes that viable.
MS. DAVIS said it is true with the base deductions, because
under PPT that capital spend gets two boosts: it can be deducted
in the net tax and it can be a capital credit. So, it's really
more the base deduction. The credit comes after "you've applied
your percentage and now it's just straight off the bottom line.
So it's really the deduction."
10:04:56 AM
MR. IVERSEN said the deduction rate tracks the tax rate. The
credit rates don't necessarily track the same way. It's fixed.
SENATOR THERRIAULT said a company is going to be attracted to
the investment by getting the deduction based on the capital
dollar that was spent last year, "so you get it back quickly,
and that's real important to the companies because it's a dollar
almost immediately back to them, versus something well out into
the future."
MS. DAVIS said that is absolutely correct. As DOR looked at the
economic variables, there's no question that it was the ability
for a company to receive that immediate return or offset against
their capital costs that was the most leveraging in the
determination of npv for a project. That's where she learned
that the higher the tax rate, the higher npv the newer
developments had. It is also is impacted by the capital credits.
SENATOR THERRIAULT said that leads him to believe that if
someone was interested in getting another dollar of government
take, but also concerned about reinvestment, "you then want to
be careful of your choice of whether you get that government
take additional dollar through progressivity or through the base
tax rate." Doing it through the base tax rate provides more
incentive for the companies to make the investment.
MS. DAVIS said that is correct for new developments. "The
countervailing side of it is when we looked at the tax structure
from a state perspective, and we were trying to assess what the
revenue impacts were; what we found is: increasing the tax rate
is very slow or not significantly an increase in state-revenue
take. In fact what was more leveraging was the progressivity. In
an environment that's triggering a progressivity, that enhances
the state revenue more significantly than a tax rate change."
10:07:25 AM
SENATOR HUGGINS said he used some of the same rationale in his
resources committee. "Because of the balance that you described,
we removed the floor with the understanding that the balance,
now, when you talk about tax rate versus progressivity, and I
never was able to come to a full conclusion when I listened to
people presenting about whether tax rate was a big impacter
versus other variables. And then right towards the end of the
committee process, someone says, we'll no longer be the highest
taxing authority in North America because of Alberta. And then I
heard a few hours ago that that was not the case--that Alberta
had, in fact, backed away from some of the things that Pedro van
Meurs had described to us." He asked where Alberta ended up.
MS. DAVIS said there is an outline of an update of where Alberta
stands. Alberta's strategy is a mixed bag-some things are more
aggressive and some are not, but overall Alberta increased its
government take. She doesn't know where it falls relative to
others.
SENATOR HUGGINS said progressivity can be more surgical and
flexible.
MS. DAVIS said she thinks that's accurate. There are ways to
select different trigger prices for different rates. It doesn't
have to be a single trigger price and a single slope.
SENATOR HUGGINS said he saw a news program that mentioned
catastrophic events like oil prices at $140 a barrel. Looking at
that scenario, the progressivity has some advantages of being
able to self adjust.
MS. DAVIS said a slope can be created to look at prices that
high. The question is whether the trigger is a gross or net
number. Gross, as defined by the House Oil & Gas Committee, is
the sales price without transportation costs. It doesn't matter
what kind of oil it is, it will all pay the same progressivity.
The trigger price may become outdated. "If we multiply the error
by adding in yet another progressivity for a much higher take,
we really get an out-of-whack system, so we would have to come
back in and retune the progressivity to match the market." The
nice thing about a net progressivity is it is self adjusting.
10:12:53 AM
CHAIR FRENCH said the tax should be in place for a decade.
SENATOR THERRIAULT said in Alberta the federal government
disallowed the deduction of the royalty, so part of their
severance tax applies to total production, which would skew the
data.
MS. DAVIS agreed.
10:14:29 AM
MR. MINTZ said there are two exceptions in current law to the
tax. One is a tax floor for North Slope production. The
governor's bill would replace a floor that applies only to
legacy fields, which are units that have produced a cumulative
total of a billion barrels and are producing at a rate of at
least 100,000 barrels a day. The minimum tax would be 10 percent
of gross value at the point of production. The second exception
to the core tax is for Cook Inlet. The new bill won't change
that. It has wording changes to make it clearer.
CHAIR FRENCH asked where lease expenditures are defined in
Version \M.
10:16:14 AM
MR. MINTZ said in Sections 19, 20, and 21 of the CS that is
before the committee. Section 160 of current law is changed by
the governor's proposal, but the CS doesn't change it. He spoke
of the PPT and a tax ceiling in Cook Inlet.
The committee took an at-ease from 10:19:12 AM to 10:21:56 AM.
MR. MINTZ summarized the changes that SB 2001 made in Section
160 that are not in the current CS. The changes were made to
make explicit some rules about how lease expenditures are
deducted to implement the different tax treatment of different
parts of the state.
MS. DAVIS asked Mr. Mintz to define point of production.
MR. MINTZ said the term "wellhead value" is often used for point
of production. The term implies the value of oil and gas just
before it comes out of well, but it is more complicated in
practice because of the processing after it comes out. Oil, gas,
and water need to be separated. Oil is considered produced when
fluids are separated and it is in marketable condition. It also
requires accurate metering. Typically the gross value at the
point of production is determined by subtracting the cost of
transportation from the sales price at the destination.
CHAIR FRENCH noted that the point of production is the last
place at which costs can be deducted against the tax. "If it's
upstream to the point of production, it's a deductible cost; if
it's downstream, it is not."
MR. MINTZ said the transportation costs after the point of
production are, and always have been, deductible, but in a
different way. The PPT maintained the current interpretation for
determining the value at the point of production, and then it
added a new provision for deducting the upstream costs.
CHAIR FRENCH said there is a physical place in each field that
can be identified.
MR. MINTZ said that is generally true.
CHAIR FRENCH said he was confused previously. He worked at
Kuparuk, and it has a custody transfer meter at the last flange
as the oil leaves that facility, and then the oil goes in a
transportation pipeline to pump station one. When the leak
developed at Prudhoe, "I assumed that was downstream of the
point of production because it was downstream of the production
facilities." But at Prudhoe Bay the custody transfers are
handled differently; they handle it right at pump station one.
He asked about Alpine and Endicott.
10:26:56 AM
MR. MINTZ said he understands that the AOGCC requires metering
before oil and gas leave the unit. That would mean there would
be a point of production before it is taken off the unit. Within
each unit there are different satellites. After separation in
the main facility it goes to the last meter. Slide 15 speaks to
a provision that is in the governor's bill and the CS.
10:28:54 AM
SENATOR WIELECHOWSKI joined the hearing.
MR. MINTZ said Section 165 of the law is where the term "lease
expenditure" is described.
CHAIR FRENCH asked for the sections in the CS.
MS. DAVIS said Sections 19, 20, and 21.
MR. MINTZ said these provisions are the same as in the
governor's bill. Most of it was written for more clarity, but
one substantive change in Section 19 of the CS is that the
department may, but is not required to, provide further
definition by regulation. The bill changes it to provide that in
order to be a deductible lease expenditure, a cost must be
allowed by regulation. It is to make it clearer and more
predictable in determining what costs are deductible.
CHAIR FRENCH asked if the regulations are written.
MR. MINTZ said not on that point, but there is a voluminous set
of regulations that went into effect last March. Since then the
department has been working on developing phase two.
10:32:06 AM
MR. IVERSEN said the regulations on lease expenditures were
carved out from PPT. He said the department has been on two
tracks, and one is to get the first set of returns in without
having honed in on these particular expenditure leases. "We have
been grappling with those over time."
MS. DAVIS said the department was getting ready for the
regulations to go out for comment at the time the special
session was called. They didn't want to be inefficient with
people's time. The goal is to have the regulations out by
January.
SENATOR HUGGINS said, "It's my understanding [that] we are in
concurrence that affirmatively stating the deductions is what
we're pursuing and that we concur with that. Is that correct?"
MS. DAVIS said, absolutely, "We want to state what is in and not
simply what is out."
CHAIR FRENCH said the PPT had a list of 16-17 things that were
disallowed, and it left open the universe of other
possibilities. That is reversed by saying what a deduction is,
and it must be affirmatively listed or it will never qualify. In
the bill in front of the committee it will happen in
regulations, not statute.
MS. DAVIS said yes, with the guidelines that the legislature
places in this bill.
10:35:00 AM
SENATOR THERRIAULT asked if the infield costs were deductible
from the gross before the tax is applied.
MS. DAVIS said that is correct.
SENATOR THERRIAULT said there was discussion about whether there
are any fields in production that now have an allowance for a
deduction on the royalty side. "Do we have a similar deduction
of infield expenses on the royalty side, when the royalty
valuation is calculated?"
MR. MINTZ said 100 percent of the qualifying lease expenditures
are deductible. "There's no allocation … between royalty and
non-royalty [indecipherable]." Section 20 language is simply
moved around for clarity with no substantive changes.
MS. DAVIS said Section 20(c) deals with overhead, which is now
in Section 19(2).
MR. IVERSEN said that was changed because currently the PPT sets
forth overhead as a direct cost which typically isn't.
10:37:30 AM
MR. MINTZ said Section 21 of the CS maintains and expands the
list of exclusions. Paragraph 6 of subsection (e) currently
includes costs arising from fraud, willful misconduct, and gross
negligence, and the administration added costs arising from
violation of law or failure to comply with a lease, permit, or
license obligation. This change came from a suggestion from a
member of the public. The second change in the list of
exclusions is in paragraph 15, and it deals with dismantlement,
removal, and restoration costs. Current law excludes that type
of cost for past production, but it allows it if it is
attributable to future production. "These costs really should
not be deductible under … and shouldn't be considered … cost of
production." The change in that paragraph would exclude all
dismantlement, removal, and restoration costs.
CHAIR FRENCH asked if the theory is that when building a
facility the economics of dismantling and restoring should be
part of the plan.
MS. DAVIS said yes. Under the leases the lessee is required to
build in future abandonment costs. In fact, they generally make
an allowance in their federal tax and depreciate that cost over
time, recovering it as a normal incident of the cost of
business.
CHAIR FRENCH surmised that the day a lease is awarded through
the competitive bid process, part of the lease payment takes
into account the removal costs.
MS. DAVIS said yes. "When you acquire the lease you incur the
legal obligation that should you do any development … you will
have that incumbent responsibility-financial responsibility-for
doing the abandonment, and for that reason, when we looked at
how the state's dollars should be targeted by way of the
deductions and the credits, we didn't feel it appropriate to
essentially spend those dollars toward something that a party
was already legally required to do and had built in to their
decision." As lease-hold expenditures the costs are both
deductions and capital credits.
10:40:58 AM
MR. MINTZ said the third change to the list of exclusions deals
with issues from SB 80 of 2007. The bill takes a little bit
different approach to the same issue. [He was told that issue
will be discussed tomorrow.] The final exclusion is for costs
for a crude oil refinery or topping plant.
CHAIR FRENCH asked why that is excluded, and he noted that he
worked at a crude oil topping plant.
MS. DAVIS said it is not considered an upstream cost. It is a
midstream refining process. It is oil that is taken from the
lease and is run through a processing plant to yield a
marketable product, "and we do not consider that in the same
vein as what we consider upstream costs-the costs to take
production and deliver it to market."
SENATOR HUGGINS stated that the resources committee asked the
administration to continue to look at that, because presently
the diesel would have to be pipelined to Anchorage from Kenai,
railed to Fairbanks, and trucked north. He said that is a left-
handed way to get diesel to the North Slope, so based on risk of
pollution and road degradation, the committee asked the
administration to make it attractive for the producers to do
this function on the North Slope.
MS. DAVIS said it is a balance of environmental, cost, and job
issues and the overall revenue to the state. When low sulphur
diesel is needed, it is manufactured in Nikiski and transported
north. Kuparuk has lower sulphur diesel than Prudhoe, but air
emissions requirements will require lower sulphur. "So they need
to do modifications to the Prudhoe topping plant that would be
upwards of $300 million."
CHAIR FRENCH asked if the diesel produced on the North Slope is
used to run trucks and other equipment.
MS. DAVIS said it is used for a wide variety of purposes. It is
incumbent upon them to make modifications, and she believes the
producers are looking at modifying the Kuparuk plant and not the
plant at Prudhoe. There also may be a third plant constructed
further east if development makes it viable. It's a very
expensive retrofit. "Whether the state should undertake to
subsidize those in some fashion or decide that they want to
subsidize them to the tune of 20 percent plus whatever the tax
rate is … it needs to balance that, which has its benefits and
detriments to the options, which is the haul road repair costs,
which were estimated by the Department of Transportation to be
$1.5 million for an increase of up to 150 truck trips, as well
as the fact that in Fairbanks right now, there is a group that
had purchased a refinery and as a consequence of their contract
with the state, the state sold them royalty oil, and as a
consequence of selling the royalty oil, they were required to
retrofit the plant in Fairbanks to be low sulphur. What happened
in lieu of that is they, instead, funded the low-sulphur
modifications to the plant in Nikiski."
SENATOR HUGGINS noted that is would be 150 trucks per day-a huge
amount.
MS. DAVIS said that was a cost estimate.
SENATOR HUGGINS said one can imagine accidents and spills.
MS. DAVIS said the estimate from ConocoPhillips, if it is not
allowed to modify its plant at Kuparuk, was an incremental
increase of 10 trucks per day.
10:49:17 AM
MR. MINTZ said the governor's bill and the CS repeal AS43.55.165
(c) and (d), and "those provisions allowed the department to
substitute cost billings under unit operating agreements in
place of the general standards for determining lease
expenditures." Instead of applying the general definition of
lease expenditures, it would be the actual costs that an
operator is allowed to bill under a unit operating agreement.
The department confronted some serious implementation issues,
which convinced it that it is preferable not to have the second
track, but go with a single track, which would be regulations
specifying allowable lease expenditures. So that is why the bill
repeals it.
10:51:54 AM
MR. MINTZ said Slide 19 deals with tax credits. The PPT enacted
a group of new tax credits, and some are in AS 43.55.023. The CS
omits all of the changes made by SB2001 except one, which deals
with Transitional Investment Expenditures (TIE). The governor's
bill, SB2001, made changes including a provision to spread out
the use of capital credits so that no more than half could be
used the first year. SB2001 has information-sharing requirements
that explorers would have to agree to in order to get credits
for exploration expenditures. Slide 20 states the following
change: "credits for capital expenditures in a unit subject to
the tax floor may be applied only against tax on oil and gas
production from that or another unit subject to the tax floor."
There are several agency rules that follow from the gross tax
floor on the legacy fields to avoid undercutting that floor, and
this is one of those rules.
MR. MINTZ referred to Slide 21 that states the following: "no
carry-forward for unused lease expenditures for units subject to
the tax floor." That is a change in the carry-forward annual
loss credit. An explorer or producer that incurs a cost that
would be deductible, but there is no production to deduct it
against, those costs can be turned into a credit to be used in
the future or sold. The Governor's bill conforms the percentage
of that credit to the tax rate: 25 percent. If a producer can
deduct costs against the 25 percent tax rate, it reduces the net
cost. Current law only allows a 20 percent credit rate, which
introduces a disparity between producers that have current
production and those that don't have any to apply their credits
against.
10:54:57 AM
MS. DAVIS said regardless of what tax rate comes forward, "we
just want to council you to match that rate to this provision."
MR. MINTZ said there is another rule to implement the North
Slope tax floor to prevent undercutting that floor. Under
current law, the person that earns the tax credit can turn that
into a transferable certificate. Under the governor's bill, an
explorer that doesn't have any production tax liability would be
under the 50 percent rule as well.
SENATOR THERRIAULT said he understands that the administration
wants to spread out the application of credit for the benefit of
the state treasury. "But by delaying the company's recouping
that dollar, you impact the net present value of their
investment decision, and I'm just wondering if it's worth it.
MS. DAVIS said there is that negative effect of delaying the
return of that value for the investor. But this aids in
providing the legislature with clear revenue flow figures to aid
in budgeting. In a year with a spike in spending, it can hit
rigorously and the state will find an unexpected decrease in
revenue. This would moderate the swing leading into a high year.
It hasn't been a problem in the recent past. Producers may spend
extraordinarily large chunks on heavy oil development.
10:59:20 AM
MR. MINTZ noted Section 14 of the CS. The bill gives more
express authority to require electronic tax filing in a usable
form.
CHAIR FRENCH asked how taxes are paid now.
MR. MINTZ said large payments must be made electronically. This
would eliminate any doubt. Referring to Slide 33, under current
law the requirement to file a tax return is triggered by owing
tax. But it is important for the department to know of tax
credits as well as liabilities. The bill requires producers to
file an annual return whether or not there is tax liability.
That is in Section 14 of the CS.
11:02:52 AM
MS. DAVIS said an oil or gas producer must file a report even it
there is no tax due. The report will contain the information in
14(1) through (9), including the details about where production
is located, the gross amount of the oil, the costs, credit
claims, and more. It is a tax return, but this was required only
when paying the tax.
11:04:33 AM
CHAIR FRENCH said Alaska has a net profits tax system, so "how
can we not be in a position of knowing what each company makes,
given the lay of the land?"
MS. DAVIS said the state does know.
MR. IVERSEN said the returns for calendar year 2006 were filed
in March of 2007. They aren't public documents.
CHAIR FRENCH asked if there is any reason the public shouldn't
know the net profit of each company since that is the basis for
the tax system.
MS. DAVIS said, "We should be able to aggregate the information,
and roll up what a net profit would be across the North Slope,
for instance."
CHAIR FRENCH said he can go to Wall Street and find the profits
of a company globally, so why can't Alaska have statutory
requirements to provide the information.
MS. DAVIS said, "We essentially do." She said to look at page
21, Section 23 of the CS regarding the public disclosure of tax
information. The statute authorizes and clarifies that the state
needs to aggregate at least three taxpayers and release the
information listed, which provides the ability to calculate
profit by gross value and the deductions.
CHAIR FRENCH asked why it had to be aggregated.
MS. DAVIS said the aggregation is required because current law
prohibits the state from disclosing individual taxpayer
information. Generic information can be provided. Three
companies are aggregated because it is successfully done in
fisheries taxes. It is done so as not to violate constitutional
issues related to privacy.
11:08:00 AM
CHAIR FRENCH asked how the rights to privacy are overcome on the
New York Stock Exchange. Shareholders get thick, detailed
financial reports from these companies.
MS. DAVIS said a state law prevents revealing that information.
CHAIR FRENCH asked if the bill repeals that.
MS. DAVIS said she thinks it does "in the sense that …
basically, not withstanding those provisions, we can reveal the
information in Section 890. So we are carving out this body of
information saying we're not going to have this type of
information be constrained from public disclosure under that
general statute."
11:09:02 AM
SENATOR THERRIAULT asked if that is normal for an oil producing
state.
MS. DAVIS said there is a sense, globally, that you need to
protect that requirement. Virtually all other countries had
"some sense of needing to aggregate it." Exceptions are some of
the newer countries that tend to be third world countries that
need to meet standards established by the United Nations for
transparency.
CHAIR FRENCH said he is struggling with the idea that the stock
exchange requires revealing information in great detail, yet a
company is protected in Alaska. If a company gets a profits-
based tax, then the state should know its profits and it
shouldn't be forced to guess through an aggregation process. "I
should be able to go to each taxpayer and say, 'what did you
make?'" This is not a Mom and Pop store; it is the central
foundation of the state's fiscal regime, and there is a great
deal of public interest in this. There is a big public push to
have more transparency.
11:11:35 AM
SENATOR HUGGINS said the administration is working to respond to
Senator Wielechowski's [request to learn how much profit
ExxonMobil made in Alaska last year].
MS. DAVIS said there is a requirement for materiality before a
company has to break out segments of its report, and because
Alaska doesn't meet the threshold for BP's and Exxon's global
portfolios, Alaska can't look at the records that are currently
filed under the SEC and ferret out the Alaska portions. For
ConocoPhillips, Alaska does meet the materiality criteria, and
it can look at its Alaska portion on its public filing.
CHAIR FRENCH said, "I thought they did it out of the goodness of
their hearts."
11:13:10 AM
MR. MINTZ referred to Slide 34, provisions that are aimed at
insuring that the department has the information it needs to
properly administer the tax. Section 15 of the CS establishes an
additional penalty for failure to supply all the required
reports. Under current law there are existing penalties for
failure to file; however, the amount of the penalty is based on
the amount of the tax deficiency. Some of the new reports don't
have taxes.
CHAIR FRENCH asked if the reports referenced on page 12 are tax
reports.
MS. DAVIS said yes, they are the annual and monthly reports
required of producers and non-producers. Without this provision,
there is no mechanism for DOR to enforce the requirement.
MR. MINTZ said Section 16 of the CS imposes an annual reporting
requirement.
11:16:03 AM
MS. DAVIS said there was also a blank spot on the state's
ability to collect information because an explorer or producer
that was developing a project but had not yet had production was
previously not required to file a return. This closes that gap.
CHAIR FRENCH suggested that a company doing seismic work will
still need to file a report.
MS. DAVIS said yes because it would be incurring lease
expenditures that will show up later. Having the annual report
gives the department an understanding of what is yet to come
regarding credits and deductions.
CHAIR FRENCH said that sounds like a good idea.
MS. DAVIS said Section 17 in the CS gives DOR the right to
request forecast information. Under existing rules the DOR could
request information as it related to a taxpayer's tax liability.
That is a backward way to do it, and the revision makes it a
forward-looking feature. It is narrowly focused and does not
make taxpayers create a separate report, but includes
information already shared with other interest owners. In
advance of a year the owners will sit down and develop an
operating plan and make a proposal to the working-interest
owners. Once they know what the operations will be, they develop
a cost scenario and essentially issue bills to their working-
interest owners quarterly. There may be changes along the way,
and those will get flagged at that accounting level, and the
bills will change. "We want the state in the same footing …
pretend like we're working-interest owners; give us a copy of
all the correspondence." It will not be a burden to the
taxpayer, and the state can adjust the revenue forecast
accordingly.
11:20:26 AM
CHAIR FRENCH asked about Section 5 on page 14, which describes
that process. But it seems to carve out specific reports on line
28, and it seems that the state isn't asking for the bills but
just for the communications between the two.
MS. DAVIS said it uses communications in the broad sense because
the state didn't want it limited to the written record. She
expressed concern that once the accounting organization is aware
the state is getting copies of everything, things might be done
verbally.
CHAIR FRENCH said it looks like the required information is
limited to just communications and not billings.
MS. DAVIS said it is intended it to be broad, and an [authority
for expenditure] issued by an operator to a working-interest
owner is a communication. Bills and solicitation of approvals
are too. If it doesn't read that way, then it should be
reworded.
CHAIR FRENCH said he will come back to this. He added that this
is a second type of penalty-it's not a tax report penalty.
11:23:59 AM
MS. DAVIS said it attaches to the obligation to respond to the
department's request for reports on the forecast information.
MR. IVERSEN said the penalty is associated with receiving the
information; it's not related to the forecast being off.
MS. DAVIS turned to slide 36, Section 18 of the CS, which
requires electronic filing of reports in a format prescribed by
the department. The state is creating a database that will be
populated with the annual and monthly returns that get filed.
The correct format will reduce errors, time lag, and staffing
needs. She hopes that it will upload automatically giving an
immediate picture. Some information will be shared with DNR.
11:26:21 AM
CHAIR FRENCH asked what stage the database is in.
MS. DAVIS said there are bids on the cost.
MR. IVERSEN said a scoping contract has been done. It is like a
needs assessment, but bids haven't been solicited.
CHAIR FRENCH asked how long it will take to create.
MR. IVERSEN said it will be a multi-year process to get it fully
integrated and functional.
CHAIR FRENCH asked how returns are filed now.
MR. IVERSEN said it's a mix of paper and electronic returns. The
taxpayers can also use a template from the state's website. Some
of the provisions in the bill are geared to getting information
in a useful format.
11:29:01 AM
MS. DAVIS said subsection (g) of Section 18 was added. The state
wants to be able to issue advisory bulletins to give guidance
through the initial phases. Mr. Mintz researched and found that
this section gives the department the authority to be able to
issue advisory bulletins for any tax.
MR. MINTZ clarified that it is limited to the production tax.
SENATOR THERRIAULT questioned the use of the bulletins.
MS. DAVIS said advisory bulletins have been used to head off
audit problems with regard to how the department is interpreting
and applying a regulation. It can flag things early.
SENATOR THERRIAULT asked if a taxpayer can still disagree.
MS. DAVIS said yes.
CHAIR FRENCH asked how many taxpayers are on the North Slope.
MR. IVERSEN estimated there to be about 30.
CHAIR FRENCH asked who else is making money besides the big
three producers.
MR. IVERSEN said he will look up who is actually making money.
It is probably significantly less than that.
CHAIR FRENCH said it probably boils down to 10-15 corporate
entities.
MR. IVERSEN said that might be closer to it. There are also
others generating credit.
11:33:49 AM
MS. DAVIS said Slide 37 references ACES Section 2, and this
language was included in the Senate CS. It authorizes DNR to
share oil and gas information with DOR. It is a provision that
has a companion piece for sharing information the other way.
There are confidentiality requirements for both agencies, and
the ability to speak to each other about relevant information is
very limited. The two have had to jump through a lot of hoops to
be able to work together, including making models generic, for
example. Consultants were quite surprised that the state put the
two agencies in "such silos." That is not found in other places,
so the goal is to enable the sharing while keeping the
protection of information.
SENATOR WIELECHOWSKI said page 3 shows two reasons that the
director can request the information, and one is for forecasting
revenue and the other is for administering AS 43.55. He wants to
make it broad enough. How do you define forecasting revenue and
what is 43.55?
MS. DAVIS said 43.55 is specifically the production tax
provision. It would not include the oil and gas income tax
provision. This was the area where the information came into
play. Section 13 of ACES or Section 12 of the CS is the parallel
provision. It doesn't have a limitation on DNR's use of it.
11:38:24 AM
CHAIR FRENCH said to suppose commissioners couldn't decide if
the information is released fast enough. A governor could
straighten that out.
SENATOR WIELECHOWSKI said it may be best to have the sections
conform more. He expressed concern over hamstringing DOR.
MS. DAVIS said the intent is that DOR would be able to use the
information it needs, so she wouldn't object to that.
11:39:56 AM
MR. MINTZ said to keep in mind the scope of the proclamation.
Venturing outside the production tax could be a problem. But it
is written very broadly to make sure the department can get the
relevant information for administering production taxes.
MS. DAVIS said Section 23 in the CS is about public disclosure
of information and how to aggregate it. She referred to a list
on Slide 39 of administrative improvements. There is an auditor
provision and a transition provision to keep current auditors to
stay in classified service. There are two places that relate to
the statute of limitations, and it was not picked up in the CS.
The governor's bill proposed a change from three to six years,
and the CS doesn't.
11:42:32 AM
MS. DAVIS said Slide 40 deals with a provision that was in the
governor's bill and not in the CS. Its intention was for the
legislature to confirm an existing regulation of DOR. When
taxable value changes, the DOR has always taken the position
that the statute of limitations does not run on a claim for the
state to recover the differential, even though it may have run
on that tax period. There is not a current lawsuit on that
issue. The AOGA said this had a hidden agenda related to
interest on the tax due-"that when we recognize that our statute
of limitations operates to allow us to go back and pick up a
period that had otherwise been closed such that there was now a
tax liability for a previously closed period, their concern is:
does this provision alter the balance of the ability to fight
about what interest rate should apply and when it should attach
to that liability. It was never our intention to affect that
dialogue or that legal debate."
11:44:59 AM
CHAIR FRENCH said the \M CS doesn't have that provision.
MS. DAVIS said that is correct.
SENATOR WIELECHOWSKI asked about a current tariff dispute, and
"how many years back would that cover if we were to prevail?"
MR. MINTZ said Congress recently passed a law placing some
limitations on that. He said he didn't think it would affect any
pending dispute on TAPS tariff.
SENATOR WIELECHOWSKI said it seems that if there was a lawsuit
and the state was supposed to be getting X tariffs but didn't,
the state would be due interest. That is standard civil law, "so
I think we need to be careful when crafting that provision."
MR. MINTZ said that one of the reasons for the debate is that
typically when FERC orders a retroactive refund, it does come
with interest. However, if the interest rate is different ….
11:47:05 AM
SENATOR WIELECHOWSKI said if it was money the state should have
gotten under the state system, it should be the state interest.
CHAIR FRENCH asked the difference between interest under a FERC
ruling versus the state.
MR. IVERSEN said the state would assess interest at 11 percent.
The IRS charges about 8 percent, but he doesn't know about FERC.
11:47:59 AM
MS. DAVIS said Slide 42 relates to transition, applicability and
effective dates. They are essentially the same in both versions.
MR. MINTZ added that applicability and retroactivity are
companion provisions. The expansion of the list of exclusions
and the repeal of 155 (a) and (d) on unit agreements are made
retroactive to 2006, when PPT started. Other changes are either
prospective or immediate.
CHAIR FRENCH said the committee will discuss how far back
retroactivity will go, but tax changes will take effect next
year and corrosion issues go back to April 1, 2006.
11:50:15 AM
MS. DAVIS said there is a provision that the resolution of
statute of limitations applies to tax periods that are still
open, so if something was in its second year and had not passed
the three-year statute of limitations, six years would extend it
out another four years. Nothing would be reopened that was
closed.
MR. MINTZ added that Section 29 was done in the PPT legislation,
and it makes sure the department is implementing regulations as
soon as the new statuary provisions apply, even though it will
take some time to develop the regulations.
CHAIR FRENCH said he is having trouble understanding how some
provisions will be retroactive to 2008 if the bill passes in the
next month.
MR. MINTZ said the regulations might not be adopted by then.
11:52:39 AM
MS. DAVIS said the CS didn't carry through Section 023 (l)
regarding tax-exempt entities not receiving credits. However, it
was amended to the House version yesterday, she said. It needs
to be discussed.
11:53:24 AM
CHAIR FRENCH outlined this afternoon's schedule and recessed the
meeting from 11:54:16 AM until 1:23:52 PM.
The committee reconvened with Senators Wielechowski, Huggins and
French.
1:24:21 PM
KEVIN BROOKS, Deputy Commissioner, Department of Administration
(DOA), Juneau, Alaska, explained that Sections 9 and 28, in
version M CSSB 2001(RES), moves classified oil and gas auditors
to the exempt service with the intention of being able to pay
them what the market is requiring these days. He said he has
been seeing difficulties in recruiting revenue auditors, and the
DOR did a pay analysis. There are 60 individuals in the auditor
job class family, but the primary focus was the oil and gas
auditors, but the system requires dealing with the family as a
whole. They raised the pay 15 percent across the board for all
60 employees based on the market. This bill refers to about 23
auditors from DNR and DOR, and it exempts them.
CHAIR FRENCH asked what it means to be exempt.
MR. BROOKS replied that they aren't represented by a union.
Every employee is considered classified unless the position is
listed as exempt. Alaska is a right-to-work state; employees are
represented by unions.
MR. BROOKS said the increased pay didn't have its "desired
effects." DOR and DNR are still having problems attracting
employees because private industry pays significantly more.
CHAIR FRENCH surmised that the public is asking why you can't
pay these employees more.
SENATOR THERRIAULT joined the committee.
MR. BROOKS replied that statutorily, classifications are
constructed on a "like-pay for like-work" concept. It's not so
simply to pay employees what the market will bear. The pay
adjustment was the first attempt to work within the constraints
of the rules. Instead of changing the complex statutes, the
other strategy is to make the employees legislatively exempt.
Medical professionals, oil and gas geologists, and the Limited
Entry Commission are fully exempt. So he is suggesting taking
these specific jobs and making them fully exempt.
CHAIR FRENCH asked if classified and exempt are the only two
choices. What is a partially exempt employee?
NIKKI NEAL, Director, Division of Personnel and Labor Relations,
Department of Administration, Juneau, Alaska, said partially
exempt employees are subject to the classification and pay plan,
so they cannot be paid an override rate. They are not subject to
recruitment provisions and are often at-will employees.
1:32:49 PM
MR. BROOKS said we all serve at the pleasure [of the governor].
CHAIR FRENCH said you could be discharged for any or no reason.
1:33:09 PM
JAN DEYOUNG, Attorney, Department of Law, Anchorage, Alaska,
said there are some restrictions on termination for bad reasons.
1:33:35 PM
CHAIR FRENCH said but a person can be discharged for no reason
but is still subject to the pay classification rules. He asked
who the partially-exempt employees are.
MR. BROOKS said they are identified in statute and include
assistant attorney generals, division directors, deputy and
assistant commissioners, and executive assistants for the
commissioners.
CHAIR FRENCH asked if the exempt employees are at-will and not
tied to the like-pay strictures.
MR. BROOKS replied yes. He said he is partially exempt and
serves at the pleasure and political whims. There are a number
of fully-exempt employees including pharmacists and medical
professionals. There is less turnover with fully-exempt
professionals as opposed to political appointees.
MR. BROOKS, referring to the topic at hand, said there are 23
positions classified as oil and gas revenue auditors, and the
bill specifies: and their immediate supervisor. Currently there
are six vacancies.
CHAIR FRENCH asked if 23 are enough to maintain a strong cadre
of sharp pencils.
1:35:51 PM
MR. BROOKS replied that DNR and DOR should answer that. Some
positions were added after the PPT was passed. Some people have
asked if the positions can be contracted, but the bargaining
contracts require a feasibility study. It has to be more cost
effective, and the idea is to pay these people more. Making the
positions fully exempt allows them to be contracted temporarily.
SENATOR WIELECHOWSKI said Section 28 would allow people who are
currently in the bargaining unit to opt in or out of the exempt
service.
MR. BROOKS said yes.
SENATOR WIELECHOWSKI asked if the current exempt employees will
get paid more.
MR. BROOKS said yes, if they are doing the same kind of work.
SENATOR WIELECHOWSKI noted that there will be people working
side by side getting different salaries.
MR. BROOKS replied yes, but with different protections and
rights.
1:39:03 PM
CHAIR FRENCH asked if the work is highly technical, why isn't
that sufficient reason to create a higher classification. That
set of skills must require a higher price out in the market.
MR. BROOKS replied that it is a bit of a quandary. The like-pay
for like-work requirements would have to get into a niche among
auditor work.
CHAIR FRENCH asked if he is concerned that creating a higher
classification for these oil and gas revenue auditors would
encourage other auditors to demand the same.
MR. BROOKS said there is an element of that. Currently there are
auditors 1 through 4, and they start at a range 18. An oil and
gas auditor 4 who has been around about 5 or 6 years is making
about $85,000 a year after adding the 15 percent. A partially-
exempt division director is a range 27, and the auditors would
go beyond that.
CHAIR FRENCH asked how much the state will need to pay auditors.
1:42:26 PM
MR. BROOKS replied that he is not sure, but fully-exempt oil and
gas engineers and geologists working in DNR and in the Oil and
Gas Conservation Commission make $125,000 to $150,000.
CHAIR FRENCH asked how many fall under that category.
MR. BROOKS replied about 25, and they are in another section.
1:44:22 PM
SENATOR WIELECHOWSKI asked if grievances can be filed by the
bargaining unit or by individuals.
MR. BROOKS said it can be an individual or a group.
SENATOR WIELECHOWSKI said he thought that the union pursues a
grievance on behalf of the individual.
MS. DEYOUNG replied that is correct.
SENATOR WIELECHOWSKI said if the union agreed to some kind of
solution, would that preclude an individual from disagreeing.
MS. DEYOUNG said there is a process for the union employee, but
the state is in litigation frequently with employees who have
exhausted that process and have other claims.
SENATOR WIELECHOWSKI asked about the union agreeing.
MS. DEYOUNG said, "We like to argue that that should be the
final decision … but that's not actually clear in the case law."
SENATOR WIELECHOWSKI said that is usually discrimination issues.
MS. DEYOUNG said that is one area because one has a statutory
right to make those claims that the union can't foreclose.
1:46:44 PM
SENATOR THERRIAULT asked if professional geologists make
$125,000 to $150,000.
MR. BROOKS said it is petroleum engineers.
CHAIR FRENCH said the auditors will be pursuing potentially
multi-million dollar claims against extremely powerful
companies. He asked what assurance they will have against
political pushing and retribution.
MS. DEYOUNG said they would be exempt from those protections.
The grievance procedure applies to classified employees.
1:48:56 PM
CHAIR FRENCH said, "You could imagine that you might have a
governor who takes a position that we shouldn't be pursuing
claims too rigorously … It is an item of concern for me in these
audits with millions of dollars at stake that there be some
insulation between the person pursuing those claims and the
political forces in the world."
SENATOR THERRIAULT asked if there could be a whistle-blower
provision to protect them.
MS. DEYOUNG said statutory protections are there, and the
whistle-blower would be one of them.
CHAIR FRENCH said he thought a whistle blower was someone inside
the organization. These are state employees looking at oil
companies.
SENATOR THERRIAULT explained that someone could be pressured not
to follow the dictate of the statute.
1:50:19 PM
MS. DEYOUNG replied there are lots of protections against
unlawful discrimination, and that would be one. But there
doesn't need to be good cause to fire an at-will employee.
SENATOR THERRIAULT suggested getting a good understanding of the
protections.
MR. BROOKS added that there are thousands of exempt and
partially exempt employees. Previous legislatures have provided
this tool to others to specify positions.
Senators Thomas and Hoffman are in attendance.
1:52:41 PM
SENATOR WIELECHOWSKI said he was a hearing officer for workers
compensation. He was glad to have the protection of being a
classified employee. All hearing officers who were exempt had
been fired when a new administration took office. He was
concerned that these positions can be terminated for any reason
at all.
1:55:26 PM
SENATOR HUGGINS said these are key positions for professionals
in a very competitive environment, "so I'm supportive of the
administration being able to do this because it's … a
cornerstone to what we're asked to do in this case for a net
tax."
1:55:57 PM
JIM DUNCAN, Business Manager, Alaska State Employees
Association--Local 52 (ASEA), said ASEA is the exclusive
representative of many of these positions being discussed here
today. If they are not supervisors, the auditors are in his
union. It is critical to have auditors who can perform the
necessary duties to protect the revenues of Alaska. The
disagreement is that those positions can be in the classified
service. The merit system of state employees is set up in the
constitution. Exempt personnel should be in policy-level
positions. A revenue auditor is not setting policy. The exempt
auditor would be exempt from the state personnel act, the state
pay plan, and a competitive hiring process. They can be
discharged at any time. Title 39 has a list of exempt positions,
and most of those work for boards and commissions; they are not
in the departments themselves.
2:00:42 PM
MR. DUNCAN said the auditors won't have a right of appeal a
dismissal to the state personnel board. They will be subject
only to general labor laws of Alaska and personnel policies of
the agency. Those policies can change with administrations.
There is a legitimate concern about the pressures these auditors
will come under. There will be clients out there very interested
in what oil and gas revenue auditors are doing. Clients can
approach the administration and request a change. He said he
doesn't believe the current administration would respond to that
type of pressure, but there will be other administrations. The
state risks continuity of service in exempt positions.
MR. DUNCAN said the auditors could be subject to outside
pressures, and the public would be opposed to that. He said he
heard Mr. Brooks say they need to do this to fill the positions
even after the two-range increase. He finds it difficult to
understand why they can't find the auditors. There are 7
auditor-4 positions at a range 24, and 6 are filled. There are 2
auditor-3 positions, and they are filled. There are 6 auditor-2
positions, and 2 are filled, but it is noted that the other
positions are being held vacant. They are not having trouble
recruiting based on the organizational chart. The administration
hasn't expressed this problem to the union. He was just
bargaining, and this issue about recruitment of auditors was
never brought up. He said ASEA was just presented with
administrative order 237 from August 24, where a cabinet-level
work group was created, and the chair asked for input. He gave
her several suggestions on positions that were hard to recruit
for. That task force should deal with this if it is an issue.
2:07:12 PM
MR. DUNCAN said several things could be done. There is no reason
not to have auditors-5 at a range of 26, and that would be 15
percent higher pay. Salary ranges in ASEA's contract go up to
range 27-"we could even put 28 and 29 if we want to negotiate
that." If it gets to close to supervisor salaries, then perhaps
their pay needs to go up too. He is willing to provide language
for the bill to resolve the issue. He recommended temporary
establishment of unique salary schedules and offering moving
allowances, hiring bonuses, and forgiving student loans. There
is a way to improve the compensation package if the state is
flexible.
2:09:57 PM
MR. DUNCAN noted page 2 or 3 on the 10/17/07 fiscal note, and he
said he would work with management on the issue of "contracting
out to hire some experts to help train the auditors." The
auditors should be trained and have the best knowledge possible,
and he offered help with writing a provision for this.
2:12:19 PM
CHAIR FRENCH said the administration wants to pay up to
$150,000. He asked if that can occur with classified service.
MR. DUNCAN said it can't happen with the current salary
schedule, which goes through range 27, but he proposes
constructing some language to create unique salary schedules and
remain in classified service.
MR. DUNCAN said right now the schedule maxes out at range 27,
but more ranges can be added. When last at the bargaining table,
"we could very well have just added a range 28 and range 29 if
we had some specific issues that needed to be addressed."
2:14:07 PM
SENATOR WIELECHOWSKI thanked Mr. Duncan for pointing out page 2
of the fiscal not. "These are auditors doing the same type of
work that the other current auditors are doing." It is $4,000
per week. It would seem that the state doesn't need to pay
anything near that. The state could pay half of that in
classified service, he surmised.
MR. DUNCAN said he thinks that is reasonable. He repeated that
six out of seven positions are filled, and by unique salary
schedules, the state can find the people to do the job.
SENATOR THERRIAULT asked if it's a problem to allow higher
ranges in a narrow band of employment.
MR. DUNCAN answered that it wouldn't open the door. There is
always pressure to raise salaries. And nurses were all moved up
recently. The state won't have to move everybody up. This would
address unique circumstances.
SENATOR THERRIAULT asked if the nursed were moved up within the
already established range.
MR. DUNCAN guessed that they were moved from a range 15 to 17.
SENATOR WIELECHOWSKI presented the question of if the employees
are exempted and with high salaries, will the state start paying
the directors and commissioners more too.
MR. DUNCAN replied that is another problem. Commissioners and
directors got a sizable raise three or four years ago.
SENATOR WIELECHOWSKI asked if an auditor-5 was created, could it
be isolated to oil and gas auditing.
MR. DUNCAN replied that he wasn't sure. There could be an
internal alignment problem, but that could be addressed by
putting an auditor-5 in all categories. It would not have to be
filled if the work is not as specialized.
2:20:51 PM
SENATOR WIELECHOWSKI asked if it would be possible to break out
the oil and gas auditors in a separate job classification, which
is done with hearing officers.
MR. DUNCAN replied it's possible.
CHAIR FRENCH asked if worker's compensation hearing officers get
paid differently than a standard hearing officer.
MR. DUNCAN said there are two different classifications.
2:21:54 PM
SENATOR THERRIAULT said hearing officers were put into a pool.
MR. DUNCAN said ASEA is working with management on that issue.
2:22:51 PM
BRUCE LUDWIG, Business Manager, Alaska Public Employees
Association/AFT, said he represents supervisory employees
including two of the auditors being discussed. He stressed that
the constitution requires a civil service system, which is very
important. It is what keeps government clean in a lot of
respects. The exempt statute has "whole pages of exceptions, and
it almost makes you wonder what's left in the other." It is
likely that most of the thousands of exempt employees get salary
overrides. The Murkowski administration raised commissioner pay
by 39 percent. But there is deferred maintenance on the
classified service. "Our pay is virtually 39 percent less than
what the cost of living has done in the last twenty years." The
result is not finding people to fill jobs. Some division
directors have a 33 percent vacancy, and he has been told by
some directors that "if we can't do something to spur
recruitment, they're not even going to have people that are
going to be able to permit AGIA when we get applications in five
years." Something has to be done with the salaries. Making
auditors exempt defeats the purpose of the classified service.
This came up when the legislature took pharmacists out of
classified service.
MR. LUDWIG said, "The division of personnel is saying they
aren't special enough that they could be their own
classification that we could set salaries on. If it's this big
of a problem that's dragging you all into it, seems to me that's
special enough that it would require a special classification."
He said his bargaining unit is still open and he would be
willing to add salary ranges. He said auditors tend to be
conservative people and might not want to take a job that is at-
will.
2:27:25 PM
MR. LUDWIG said his union used to represent doctors and the
state epidemiologist. A doctor called him and said federal
services are making $40,000 per year more than him. He had been
told by personnel that the only way the doctor could make more
money was by going into the exempt service, but he liked the
protection he had. There are no more doctors in the bargaining
unit. Many departments contract out work for $200,000 a year,
and "we don't pay our own people anywhere close to that."
2:29:10 PM
Senator Ellis joined the hearing.
SENATOR WIELECHOWSKI asked if the administration has raised this
as an issue.
MR. LUDWIG said, "No, in fact at our table we raised recruitment
and retention. We brought it up from the very first day." The
only thing they got back from the administration was a slogan
contest and an idea from the commissioner of relaxing hiring
requirements.
2:30:30 PM
SENATOR THERRIAULT asked if 6 of the 7 positions are full.
MR. BROOKS clarified that out of 23, 6 are vacant. He offered to
get accurate vacancies. Oil and gas revenue auditors are a
separate job classification with 4 series. He doesn't know which
are vacant.
CHAIR FRENCH asked for that. He asked for a response to the idea
of keeping the positions in a classified service.
MR. BROOKS said there were a lot of general statements that are
discussed with the union on a regular basis. "Perhaps you could
put a fifth level, but there's a lot of different factors." As
you progress up the salary schedule, once you pass range 25, the
spread between ranges is only 3.5 percent. Everything is
compressed as the ranges get higher. "I'm sure that higher range
wouldn't bother the unions at all; I'm sure if we added whatever
number of steps or ranges that we wanted to, and those become
part of a more complex bargaining exchange."
2:33:31 PM
CHAIR FRENCH said he would like to pay auditors sufficiently and
protect them within the union at the same time.
MR. BROOKS said they did a market-based pay analysis, and about
1,000 classified employees have benefited from the adjustments.
Nurses were part of one of the study groups and hundreds of
nurses got raises. The attempt to do that with auditors had some
success, but this group needs a surgical adjustment.
2:35:24 PM
SENATOR WIELECHOWSKI asked about the executive order.
MR. BROOKS said that was Administrative Order 237, and they are
looking at recruitment and retention issues more broadly. The
goal is to make recommendations to the governor in November.
The belief is that there are other things to do outside of pay,
like flexible staffing and flexible work weeks. Input was
solicited from the unions. This won't be solved overnight.
SENATOR WIELECHOWSKI asked if recruiting is difficult elsewhere
within the classified service.
MR. BROOKS replied yes - some more than others.
SENATOR WIELECHOWSKI said he is hearing it's systemic.
MR. BROOKS replied it's many, but not all. The administration is
trying to establish criteria of failed recruitment rates and
then do a market-based analysis.
2:38:58 PM
SENATOR WIELECHOWSKI asked if the administration plans to come
to the legislature and exempt more individuals.
MR. BROOKS replied there is no intent to whittle away at the
unionized work force; the administration is trying to address a
specific need here. "It's not something you see very often."
2:39:32 PM
SENATOR THERRIAULT asked about recruiting the oil and gas
auditors and if they need to be trained. A CPA has learned all
kinds of accounting, but this is very specialized. "Are you
trying to get to a point where you actually have the potential
of attracting somebody from a company who's done that training
up for you?"
MR. BROOKS said to ask the DOR.
SENATOR THERRIAULT said he is curious if the state is looking
for someone who is already trained and ready to work.
MR. BROOKS said the requirements are established for the family,
and then the DOR looks for the specific experience in the field.
A less experienced person could be hired at a lower level.
2:41:51 PM
SENATOR WIELECHOWSKI noted the fiscal note had just over a
million dollars for 3 auditors, and the math doesn't compute.
MR. BROOKS said it is a weighted number because contractors have
to pay their own social security tax or benefits. The DOR put
the fiscal note together.
SENATOR WIELECHOWSKI asked if it's an average of $340,000 per
auditor.
MR. BROOKS said to ask the DOR.
2:43:13 PM
SENATOR WIELECHOWSKI asked the average salary of ranges 24-28.
MR. BROOKS replied that a range 24-F is $7,000 month.
CHAIR FRENCH asked Mr. Brooks for the number of auditor
vacancies by class and the allowable pay scale. He asked for him
to have a conversation with Jim Duncan of ASEA.
The committee recessed from 2:44:37 PM to 2:59:03 PM.
SENATOR GARY STEVENS joined the committee.
CHAIR FRENCH asked for an overview of the penalty sections.
JONATHAN IVERSEN, Director, Tax Division, Department of Revenue
(DOR), said penalties relate to the transmittal of information
to DOR and are not based on delinquent tax payments. It is up to
$1,000 per day for failure to provide monthly, annual, or
forecasting information. This is the way to force companies to
file the reports whether tax is due or not. Current statutes
deal only with unpaid tax.
CHAIR FRENCH noted a helpful memo on that topic.
MR. IVERSEN said there are several penalty provisions. AS
43.555.430, Section 46 of ACES, and Section 14 of the CS discuss
the annual reporting requirement.
CHAIR FRENCH asked the penalty for not filing it timely.
MR. IVERSEN said it is up to $1000/day in ACES and is in
addition to other civil and criminal penalties.
CHAIR FRENCH asked if this makes certain that anyone doing oil
and gas business on the North Slope files a return.
MR. IVERSEN said it is statewide.
SENATOR THERRIAULT asked for clarification.
3:04:20 PM
MR. IVERSEN replied it could be an additive penalty if there is
failure to file with an underpayment. The first one is related
to the annual filings.
CHAIR FRENCH asked if an oil company decides to not file a
return, could it skirt the law by paying a $365,000 penalty for
missing 365 days of reporting.
3:05:43 PM
MR. IVERSEN replied he will answer that by discussing other
penalty provisions. The basic penalty provision is in AS
43.05.220, and it sets up a civil penalty of 5 percent for each
30-day period, or fraction of that period, during which a
taxpayer fails to file or underpays. That penalty may not exceed
25 percent in the aggregate underpayment. If a company fails to
file, the DOR will do an assessment and jeopardy audit, and it
will base the tax on that.
CHAIR FRENCH asked if the new requirement in ACES is on top of
existing laws to bring taxpayers into compliance.
MR. IVERSEN replied yes. There is a "get-out-of-penalty" free
card if the burden of proof is met where the taxpayer can show-
which is not easy-that the failure to file or to make payment is
due to a reasonable cause and not willful neglect. He said that
wording is based on internal revenue code standards and it's a
tough burden to meet. From Section (b) there is another penalty
due to intentional disregard of the law or to negligence with an
additional 5 percent assessed of the unpaid amount. There is an
option for reasonable cause. In the same section, (c) covers
fraud penalties, which are 50 percent or $500. There are other
penalty provisions addressing interest. AS43.05.290 describes
criminal penalties based on willful attempts to evade taxation.
There are felony and misdemeanor charges, perjury penalties, and
abetting penalties. What ACES adds are just penalties for
failing to file reports even if there is no tax consequence.
3:11:36 PM
SENATOR WIELECHOWSKI asked how often the penalties are used.
MR. IVERSEN said interest is a different matter, but "we don't
see a failure-to-file type penalty currently." There are a
limited number of taxpayers. There is a penalty provision that
relates to the estimated installment payments from the PPT.
3:14:36 PM
CHAIR FRENCH asked about failure to provide independent
information in ACES.
MR. IVERSEN said Section 17 is the penalty for not reporting.
CHAIR FRENCH asked if it was for specific information requested
by the DOR.
MR. IVERSEN said it is information that is deemed necessary for
forecasting revenue.
CHAIR FRENCH said it needs to be worked out, but he wanted to be
clear that there are two types of penalties, one for returns and
one for forecasting. The forecasting information penalty is the
same as the report penalty--$1,000 per day.
MR. IVERSEN said yes. That one penalty provision hits both
monthly and annual reports. The other hits the forecasting
information. The annual one is due on March 31. The final
monthly is due at the end of January for December production.
CHAIR FRENCH surmised there are 12 monthly reports and 1 annual.
"So someone who is getting into trouble at least knows that the
maximum amount of trouble they're going to get into is 13 per
year." But is seems different under the forecasting information,
which could be requested everyday. It is brand new, so how will
it work and how will penalties be assessed?
MR. IVERSEN said there are a lot of vagaries, but DOR would
request budget-related materials that are being communicated
between parties in the units. If there is only one working-
interest owner in a unit, DOR would request whatever budgetary
projections they have. At that point, DOR would likely ask for
specific information about how often those are done, with
updates on a monthly basis. If a unit is only doing quarterly
budget updates, then DOR might get only that.
CHAIR FRENCH asked how to know what to ask for, and if any of
that information is collected now.
MR. IVERSEN said it will likely not come from the auditors, but
from the economic research staff. Michael Williams heads up that
section. There is a certain amount of value in these forecasts,
but it is not the be all and end all. It won't be used to harass
the taxpayers for everything they have.
3:22:45 PM
CHAIR FRENCH assumed a scenario of the state making a reasonable
request that is not complied with, and he asked if that is one
violation or an ongoing violation.
MR. IVERSEN said if DOR requested a report that it knows exists,
it would be $1,000 per day until it was received.
CHAIR FRENCH noted that 10 reports would add up to $300,000 in
one month. He asked if there will be appeal rights.
MR. IVERSEN said it will be the same as exists now. It would
first go to an informal conference within the DOR, and it could
end in the Superior Court.
3:25:43 PM
CHAIR FRENCH mentioned a memo from Mr. Bullock on penalties. He
believes these penalties are defensible.
MR. IVERSEN spoke of the statute of limitations-the time period
from when the return was filed until DOR could assess it. ACES
made it 6 years; the CS keeps it at 3 years.
CHAIR FRENCH asked if that pertains to the two penalty
provisions.
3:27:46 PM
MR. IVERSEN said the statute of limitations begins when the
return is filed. That period can easily be more than three years
anyway if both parties agree. If the state runs out of time with
the statute of limitations and the taxpayer still hasn't
provided the information, DOR would be forced to do a jeopardy
assessment, making its best guess at the tax. DOR wants to use
the joint-interest billings as part of its audit process, and
the audits of joint-interest billings between taxpayers. Those
can take years to accomplish. After filing, there are "a few
years there where we've got joint-interest audits ongoing and
then conflicts and hopefully an eventual resolution." That would
be through arbitration, negotiation, or litigation between the
parties, and "we would like to have the benefit of those audit
resolutions in making our own assessment." That is part of the
impetus for the extended statute of limitations. Also, DOR is
now dealing with the extra figures of upstream costs.
SENATOR THERRIAULT asked for the section.
MR. IVERSEN said the first reference in ACES is in Section 14.
It is also in AS 43.55.075, Section 50.
3:34:17 PM
SENATOR WIELECHOWSKI asked the revenue consequences to the state
if the statute of limitation is not extended.
MR. IVERSEN answered that the state could run out of time with
the compressed time frame and the additional data it needs to
deal with. There may not be more tax revenue. But there are
extra costs associated with that. Jeopardy assessments are a
tough way to do business and the state prefers not to. He would
rather have the time to do it right the first time and not fight
it out during appeals, with all the associated costs.
3:36:11 PM
SENATOR WIELECHOWSKI surmised that there might be a little
saving in money or time and aggravation. The other side is
complaining about the 6 years of back interest at 11 percent.
MR. IVERSEN said if they underpaid their tax, that's correct.
Using waivers under current law, they now have to pay that
interest. "If we do a refund of the amount that has been
assessed within … 90 days of the date the return was filed and
the state does not owe interest … for an overpayment. It is an
issue." The counter argument is that more information is needed,
and under PPT and ACES, the state is required to look at the
billing practices. The pressure will burden information
management and being able to use the information in making the
assessments. Auditing is always behind; one must wait until the
returns are filed. That triggers an amended return, which would
start the clock again. He said DOR has been rather speedy,
however. But PPT returns audits have not begun.
3:39:45 PM
SENATOR WIELECHOWSKI asked if the state loses anything when
negotiating the time limits with taxpayers.
MR. IVERSEN replied no, it is not a compromise at all. "We don't
decrease the amount of tax due; we don't abate any penalties; we
don't reduce any interest … because we'll just go ahead and make
the assessment." The provision is more of a means to reduce
conflict.
SENATOR WIELECHOWSKI asked if the state doesn't have the time to
do an assessment and three years comes up, "can you just make an
assessment with not very much foundation?"
MR. IVERSEN replied he didn't know of any specific prohibition,
but he would want to avoid that. "It would be horrible on
taxpayer relations." A jeopardy assessment would come into play
when the state is not getting the information and there is no
willingness by the taxpayer to waive the time limit.
3:42:06 PM
SENATOR HUGGINS said a witness spoke about 38 cents and 92 cents
on the dollar with regard to this provision. It needs
examination.
SENATOR WIELECHOWSKI said it is based on compound interest.
MR. IVERSEN added that other states have gross production taxes
with a statute of limitations of 4 or 5 years, and Alaska is the
only state using a net production tax.
CHAIR FRENCH noted that 6 years appears to be the outer boundary
of what other states use, but no state has adopted the complex
net production tax.
SENATOR WIELECHOWSKI asked why the state really needs 6 years.
"Is it the joint billings?"
MR. IVERSEN took him to AS 43.55.165 where there is a
requirement for determining what costs are lease expenditures,
and the state is required to look at direct costs and typical
industry practices and standards. Joint-interest billing audits
are a tool in seeing what items have been excluded by other
interested partners.
CHAIR FRENCH said the items excluded are what the partners won't
be reimbursed for.
3:47:52 PM
SENATOR HUGGINS said the DOR is not bound by that, so there is
flexibility.
3:48:31 PM
CHAIR FRENCH asked about the itemization of returns and how
detailed and specific it is.
MR. IVERSEN replied that it varies. DOR has not been able to
determine costs attributable to a particular well from the filed
returns. It can determine operating and capital expenses and the
value of production from a unit. For example, "For a taxpayer in
the Prudhoe Bay unit it would be that particular taxpayer's
share of that unit, and sometimes it is broken down, in addition
to that, by field." He said it depends on the area. It is more
specific in Cook Inlet, for instance, because the calculation is
made based on each lease or property. There is a level of detail
provided and it is delineated according to the components that
would go into the tax calculation. The DOR gets varying degrees
of backup data. Some taxpayers submitted very detailed
spreadsheets down to the nuts and bolts level of capital and
operating expenses.
CHAIR FRENCH asked if DOR has the level of specificity that is
needed to do accurate audits.
MR. IVERSEN said that is the start; "that is the base document
that we audit." So by taking that information, then with every
audit, "we ask a lot of questions."
CHAIR FRENCH surmised: "You volley back with 20, 30, 40, 50
questions and try to separate that out."
MR. IVERSEN said that is correct in some instances.
CHAIR FRENCH asked why not require that information in the first
place.
MR. IVERSEN said DOR is working toward that to some degree. It
has to be audited anyway. ACES asks for "the additional
authority … with the annual reporting requirements, there are at
least a couple more delineations. And, really, we have this
authority anyway, but we wanted to clarify it and crystallize it
in the ACES bill so that when we get to the point of
standardizing that information that we want to feed into the
database in the form that we want-electronically--that we're not
going to have any pushback to get there." It's a step toward
standardization, and it has been a learning process.
CHAIR FRENCH said he is asking if the state will be able to get
enough information through this legislation because it will be
hard to make changes in the future if the state needs more power
to do that.
MR. IVERSEN said there is a catchall provision, which has caused
some angst with the taxpayers. Section 48 of the bill and
Section 16 of the CS refer to the monthly reports: other records
and information the department considers necessary for the
administration of this chapter. He noted that under the general
powers of the commissioner of revenue, it gives the department
broad powers to gather information for computing tax. We have
the authority, arguably, under current law. What we're seeking
to do with ACES, again, is to crystallize that--particularly
with (f) relating to the monthly reporting requirements." Under
current law there isn't the same type of monthly reporting
requirements.
3:57:36 PM
CHAIR FRENCH said "qui tam" is a provision for whistle blowers.
Qui tam is a legal provision in the United States code under the
false claims act. It dates back to the Civil War when there were
a lot of false billings. It compensates people who report the
wrongdoers. Recently, ConocoPhillips was fined for an oil spill
from a tanker, and the crew member who reported it to the Coast
Guard got $250,000. Without that tip-off the spill might not
have been discovered. There is no qui tam provision in ACES. It
was argued that it would only pertain to oil taxes because that
is the issue at hand. He asked the administration's position.
MR. IVERSEN said he doesn't have the authority to state that
right now. There are concerns of just relating it to the
production tax. He said Illinois had such a provision, and it
was repealed as it applied to taxes. There are at least two
states, Oregon and Florida, that have whistle-blower provisions
relating to tax.
The committee took an at-ease from 4:01:47 PM until 4:15:07 PM.
MARILYN CROCKET, Executive Director, Alaska Oil and Gas
Association (AOGA), said AOGA is a trade organization with 17
members representing the majority of oil and gas exploration,
production, refining, marketing, and transportation activities
in Alaska. She introduced Tom William who is a tax attorney for
BP. He was once the Director of the Tax Division in the DOR and
later the commissioner. He was the architect of several oil and
gas tax methodologies that are in place today. He wrote the
regulations that implemented the state's former separate
accounting tax and the tax method that replaced it. He
supervised the first property tax valuation of the Alaska
pipeline, and he administered the state's temporary reserves tax
in 1976. He was on the Board of Trustees for the permanent fund.
He became the father of ELF [economic limiting factor tax
method]. He was vice president of Cook Inlet Regional
Corporation before joining BP. The tax committee developed a
unanimous testimony for SB 2001.
4:18:55 PM
TOM WILLIAMS, Senior Royalty And Tax Council, BP Exploration-
Alaska, Inc., Chair of the AOGA tax committee, said AOGA concurs
that the state should have capable auditors. "Session audit
staff is essential for legislators, government officials, and
the public to have full confidence that Alaska's tax laws are
being firmly, fairly, and consistently enforced." That will help
provide stability and transparency, which will help AOGA members
pay the correct amount of tax as it become due. He doesn't mean
to disparage any auditor currently working for the state. The
legislature can make the tax fair and straightforward for
auditors, or it can make it a nightmare for them as well as for
the taxpayers. The difference lies in whether producers and
explorers may rely on an operator's joint-interest billings to
them. If allowed by DOR, such billings would still be adjusted
to remove expenditures in them that are specifically disallowed
or to adjust those that are subject to allocation. AOGA is
worried that repealing AS 43.55.165 (c) and (d) could deprive
DOR of this important tool.
4:21:17 PM
CHAIR FRENCH said he has a copy of the white paper on that.
MR. WILLIAMS said it was encouraging to hear that Mr. Iversen
would like to use the joint-interest billings where it is
appropriate. He said the authority to use them will be repealed.
The original version of the bill, Page 42, adds language to
43.55.165 (b), which says: "in determining whether cost or lease
expenditures, the department shall consider, among other
factors, typical industry practices and standards in the state
that determine the costs that an operator is allowed to bill a
producer that is not an operator." AOGA's concern is if
beginning with industry standards and practices, "it is a little
like saying 'here is books and records with 10,000 or … 100,000
receipts that we've been invoiced for and we're going to let you
… we're just going to hand the internal revenue code to see
where you start.'" That is different from starting the audit
with the filed tax return. "Here it's saying use the
principles." It can use this authority to adopt regulations to
proscribe exactly what those practices and standards are. He
doesn't dispute that, but once a standard is set, it's not
always the same as starting with the results that have been
created under them. The work for the auditor and the taxpayers
will be much harder if DOR doesn't start with the billings.
4:24:46 PM
MR. WILLIAMS said he thinks Mr. Iversen was agreeing with that
point. It can be a very useful starting point, especially for
the people who don't operate the field. "That's all they get is
the billings from the operator, and they write their checks."
MR. WILLIAMS said it starts on page 16 of version m.
SENATOR THERRIAULT asked what part of that language is being
proposed for deletion.
MR. WILLIAMS said that is in his white paper. The first page of
the white paper has language in bold that reads: "the department
may authorize or require ... that the costs that are incurred by
the operator during a year and are billable or billed to the
producer may be used as the lease expenditures." He said this is
the specific authority to use billings from the operator to the
partners. It is not mandatory and is subject to conditions of
regulations. The department can put conditions upon the use of
the joint-operator billings if it finds that it is appropriate
to do that. These will be in phase 2. His whole point is if this
is discretionary, DOR may do it, but if the conditions are met
and comply with the regulations then the billings can be used.
Under (c), if there was a field right next door, the department
could authorize to take the principles from the field where
there are arms-length billings and extend them to that next
field. It wouldn't have to, he noted.
4:27:58 PM
MR. WILLIAMS said that if the discretion is repealed-not the
directive-"doesn't that usually mean that the department can't
do it?" He said there is nothing proposed for deletion that is
tricky, other than the fact that it does say that the department
may authorize or require these materials to be used as a
starting point. That is a good starting point, but if it gets
repealed it implies that now DOR can't use those, they must go
back to the first principles. This is the short cut for
taxpayers and auditors, because they will know where to start.
They don't have to figure out what costs weren't billed. The
costs that aren't going to be billed may be costs that an
operator has that aren't sufficiently direct costs. "We don't
get into fights about whether it's ordinary or necessary. What
we have instead is a starting point-what the partners were
willing to pay, who aren't in the business of letting the
operator spend their money unless it's for the right purpose.
And that's the point."
CHAIR FRENCH said is seems like Mr. Williams is arguing to give
the DOR more power.
MR. WILLIAMS said, "We want the Department of Revenue to be able
to start with the thing that makes the most sense. We want to
have a tax that, when we report and pay it, and we may have all
these penalties that you just heard about if we underpay it;
we'd like to be able to get it right the first time." It will be
audited, and nothing will be slipped by. There is a value to
getting it done right. A lot of it is automated for the
operators and partners. If the software is right the first time,
it will repeat with the same groups of billings. It will make
things easier for taxpayers and simplify it for the auditors.
4:31:22 PM
MR. WILLIAMS said he thinks the repeal could have unintended
consequences. The authority is that the DOR "may" do this, so
there is no harm by keeping it on the books. It is not forcing
the department to do anything, but it gives it the discretion.
SENATOR WIELECHOWSKI said he would like DOR's comments. AS
43.55.165 seems to lay out a way for the DOR to determine what
is a lease expenditure. On page 16 of the CS, there is a section
that reads: "in determining whether costs are lease
expenditures, the department shall consider, among other
factors, a number of things listed." He asked if there is a
conflict there and that is why the DOR took it out.
4:33:06 PM
MR. WILLIAMS said he doesn't know where the concern was.
SENATOR WIELECHOWSKI asked if there is a dispute between the
language requiring DOR to make a finding of fact and page 16 in
the CS. "I'm wondering if that is why they changed it."
MR. WILLIAMS said the language of the CS is currently almost
exactly the same as in 165 (a) now. This is not new language in
the tax law; it is being relocated from (a) to (b). But (c) and
(d) are in there as well, and that is the discretionary
authority to start with what's been billed to the partners.
SENATOR WIELECHOWSKI said it requires the DOR to make a finding
that operating agreements are substantially consistent with DOR
determinations of standards. "It is very complex, but I'm
wondering if that's the difference because what they're changing
requires them to make an actual finding, and I'm not sure the
new law actually requires them to make that similar finding."
4:35:32 PM
MR. WILLIAMS said the new law does. The word is 'determination'
at the bottom of Page 16. The DOR will make a determination.
There is nothing here that the DOR isn't going to do in
enforcing the tax, and the whole purpose is not to get into a
debate with the DOR, but to caution about repealing it for no
reason.
CHAIR FRENCH said the law doesn't say it is mandatory, nor does
the overview. It allows, not mandates, DOR to substitute
billings. Perhaps they have been imprecise in their testimony,
but the language suggests it is still allowable. "Am I missing
something?"
4:37:08 PM
MR. WILLIAMS said the commissioner said it was mandatory at
hearings. "I don't know why he thinks that, but if that's the
reason, then so be it." But it seems that nothing in (c) and (d)
seems to be mandatory, but the justification has been that they
aren't necessary. He is not telling the committee what it does,
but the committee will know after reading it carefully. But if
there is a high element of discretion about using the joint
interest billings, and it is taken away, the most logical
consequence and implication is that it can't be done any more.
If there is a problem with the language, fix it rather than
repeal it.
4:38:33 PM
CHAIR FRENCH asked if changing the word "shall" to "may" on Page
16, line 31, would satisfy this concern.
MR. WILLIAMS said, "That language is not the source of our
concern." "Our concern is that when you have language elsewhere
that's going to be repealed that says you may use the joint
interest billings, that doing that repeal may be construed to
take away that authority."
SENATOR HUGGINS suggested conferring on this. It is interesting.
4:39:48 PM
MR. WILLIAMS said AOGA has no position on whether [auditors]
should be classified. On the issue of penalties, AOGA has
problems with the two penalties referred to by Mr. Iverson. He
noted the $1,000 per day for late tax returns in addition to
$1,000 per day for each report, statement, or other document
that DOR considers necessary to forecast state revenue. It runs
from the date that DOR requires the information. The penalties
are unnecessary because there are already significant penalties
on the books, and they threaten to become excessive out all
reasonable proportion to the nature of the infraction in most
situations. There already is a 5 percent penalty for failure to
file based on the amount of the unpaid tax. If a company ends up
paying a tax but doesn't file a return, there may still be a
penalty for not paying on time. It is capped at 25 percent after
4 months and a day.
MR. WILLIAMS said there is a second one for underpaying. The
third penalty is 5 percent for an underpayment due to negligence
without intent to defraud. Sometimes taxpayers believe a
regulation is wrong, and their position is legally correct. The
penalty is paid unless the taxpayer wins. By regulation, DOR has
linked this failure-to-pay penalty to the 25 percent penalty,
making it a 30 percent payment. There is a 50 percent penalty
for underpayment due to fraud. In addition, AS 43.05.130 already
provides that a person who violates a provision of the tax code
or a regulation adopted under those provisions is subject to a
civil penalty of not more than $1,000 for each violation.
4:43:38 PM
MR. WILLIAMS said in terms of DOR's ability to use other means
of getting the information it needs, 43.05.010 makes the
commissioner hold investigations necessary for the
administration of state tax and revenue laws. "That gets you
right into the issue of forecasting-that's existing authority."
The commissioner can issue subpoenas and require the production
of necessary documents and correspondence. Section 40 of the
general provisions of the tax code also amplifies on the powers
of the DOR to issue subpoenas and provides for judicial
enforcement of them. If DOR wants information it can get it.
With respect to forecasting information, DOR could just as
easily write a regulation on the types of information it wants.
There is sufficient statutory basis for such a regulation. It
has the further advantage of being open to updating when
circumstances change. For these reasons, the proposed penalties
are not necessary. A penalty of $1,000 per day for each
"document" can quickly reach disproportional levels.
4:46:05 PM
MR. WILLIAMS said to suppose an individual document is given to
the DOR on a timely basis, but copies of it are two weeks late.
It is the information that DOR needs--not all the documents.
This should be dealt with in regulations. He recalled a
situation involving the former $25 a day late filing penalty,
and DOR issued an audit for $28 million, even though the amount
of tax was less than $4 million. There is nothing in the bill to
indicate the standards for setting the penalty. This is the
administration's bill, so DOR could have explained some
standards. He said to ask the DOR on how the penalty should be
scaled down from $1,000 per day and for what reasons. Even if
the legislature chooses not to proscribe standards for reducing
the penalty, at least DOR's opinion can guide taxpayers if the
penalty becomes law.
4:48:24 PM
MR. WILLIAMS asked if he can submit testimony on the statute of
limitations. Qui tam is the kind of lawsuit that arose in
medieval England, and it became common in the United States as a
suit by a private person brought against someone for alleged
fraud against the federal government, usually by overcharging
the government for goods and services. Under it, the lawsuit is
filed under seal and the defendant is forbidden from disclosing
anything about the case to anyone. The U.S. attorney has a
choice of appearing in the case and taking over the prosecution
of the claims. Otherwise, the plaintiff--or relator-can
prosecute the case alone. A successful relator gets a percentage
of the government's recovery plus attorney's fees. The whole
concept is inapplicable to the concept of the oil tax. Because
of the confidentiality of the tax information, no one will have
the information except for company employees and the state
employees who enforce the tax. No one working for the company
preparing the tax return is a plausible candidate, because those
people are under oath, and the penalties for perjury would be
applicable if a false return were knowingly filed. State
employees already audit the tax returns, so it is their job to
find erroneous claims.
4:51:18 PM
CHAIR FRENCH asked about people working for the company who are
not in charge of preparing the returns, but may stumble upon a
false claim or another attempt to deceive the state.
MR. WILLIAMS said that is a remote possibility given the size of
even the small companies. He noted the thousand or tens of
thousands of bills Prudhoe Bay pays each month to contractors.
So it is automated as much as possible. The opportunities for
individuals to intervene are slim, because it is a computer. A
software error should be fairly easy to find, "but the
opportunities for a person to actually say, 'well, is this in or
out?'--those are pretty unusual."
4:53:26 PM
CHAIR FRENCH said that reasoning doesn't go to the point that no
one working for the company is a plausible qui tam candidate.
There may be individuals who become aware of tax misdeeds, and
absent a financial incentive, they won't expose their company
and risk their jobs.
MR. WILLIAMS said there are two people working in volume
accounting at BP, and they make sure that all the partners know
how many barrels of oil are being produced and that their share
is exactly what they nominated to receive. Other people are
responsible for talking with software people regarding changes.
Otherwise, they are mostly working with the state in response to
audit requests. The head of the division is a federal tax person
working with the IRS. He said his job is to provide legal advice
when regulations change. "I suppose it is me who could be a
whistle blower, and I can tell you from personal experience that
if there were anything that I thought was false or incorrect
that was in the return, I would blow the whistle internally to
try to stop us from doing it before it ever got so far as I'd
have to come to the state in a qui tam proceeding."
4:57:11 PM
SENATOR WIELECHOWSKI said no one is implicating you, but there
are bad apples in organizations, and criminal negligence was
just pled. There are breakdowns in systems. This revenue is 85
percent of Alaska's budget. If information is being hid, there
is a lot of trepidation by the Alaska people in going to a net
profit system, and qui tam is an extra layer of protection.
4:58:22 PM
MICHAEL HURLEY, Director, Government Relations, ConocoPhillips,
spoke of moving the statute of limitations from three to six
years. "Our perspective was: we were hiring more auditors, so if
you have more auditors you shouldn't need extra time." Six years
is a long time, especially with 11 percent interest. The
auditor's job is to find underpayments, and they always do. "We
fight about it, and sometimes we just pay it off, and sometimes
we argue about it some more." Going to six years makes it
difficult.
MR. HURLEY said reporting and penalties go together. In the CS,
Section 14, there is a discussion about what is going to be in
an annual return. Additional detail is required. That's fine,
but subsection (f) on page 13 covers monthly reporting. That is
analogous to federal quarterly filings. The annual filing is
awful with forms of all kinds and detail once a year. Quarterly
filings are just one little form, and that was the way the PPT
was set up. He understands the department's desire to get more
than just a check, but there are seven things required on a
monthly basis plus anything else DOR wants. "I have no clue what
that means; I don't know if it means my entire set of books and
records, or what?" He said he doesn't feel comfortable with the
DOR getting whatever it wants every month.
5:03:13 PM
MR. HURLEY said the other reporting relates to forecasts. In
asking for information about the future, the tax division
director said it includes whatever the operators and working-
interest owners talk about. He said he understands that, but
when there is no working-interest owner, it could be lots of
information. For example, ConocoPhillips regularly participates
in lease sales, and under this language, DNR and DOR can share
information. So DNR can tell DOR to ask ConocoPhillips what it
plans to spend on a lease sale. That would be legal. The DOR can
require the company to tell what it plans to spend. Sharing that
information isn't always a good thing.
5:06:12 PM
CHAIR FRENCH said it is unreasonable to ask what you will spend
for a lease next month. He said he reads it differently but
understands his concerns.
SB 2001 was held in committee.
The committee adjourned at 5:06:38 PM.
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