Legislature(1993 - 1994)
04/21/1994 02:00 PM Senate L&C
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
SENATE LABOR AND COMMERCE COMMITTEE
April 21, 1994
2:00 p.m.
MEMBERS PRESENT
Senator Tim Kelly, Chairman
Senator Steve Rieger, Vice-Chairman
Senator Bert Sharp
Senator Georgianna Lincoln
Senator Judy Salo
MEMBERS ABSENT
All Members Present
ALSO PRESENT
Senator Loren Leman
COMMITTEE CALENDAR
SENATE BILL NO. 185
"An Act relating to the limitations period for assessments for
certain state taxes, and for collection, after assessment, of taxes
due the state; and providing for an effective date."
PREVIOUS SENATE COMMITTEE ACTION
SB 185 - See Judiciary minutes dated 4/20/93, 4/21/93
and 4/23/93. See Labor & Commerce minutes dated
3/22/94, 4/7/94.
WITNESS REGISTER
Josh Fink, Staff to Senate Labor & Commerce Committee
State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Offered information on SB 185
Attorney General Bruce Botelho
Department of Law
P.O. Box 110300
Juneau, AK 99811-0300
POSITION STATEMENT: Offered information on proposed
committee substitute to SB 185
John Pilkinton, Director
Oil & Gas Audit Division
Department of Revenue
550 West 7th Ave., Suite 570
Anchorage, AK 99501
POSITION STATEMENT: Offered information on SB 185
Ronald Bitzer, Senior Appeals Officer
Oil & Gas Audit Division
Department of Revenue
550 West 7th Ave., Suite 570
Anchorage, AK 99501
POSITION STATEMENT: Offered information on SB 185
Paul Sullivan, General Tax Counsel
Exxon Company, U.S.A.
Houston, TX
POSITION STATEMENT: Testified in opposition to SB 185
ACTION NARRATIVE
TAPE 94-31, SIDE A
Number 001
CHAIRMAN TIM KELLY called the Labor and Commerce Committee meeting g
to order at 2:00 p.m. He brought SB 185 (LIMITATIONS PERIOD FOR
TAX ASSESSMENTS) before the committee and requested Josh Fink,
committee aide, to explain some issues that Attorney General
Bothelo recommended the committee may want to look at.
JOSH FINK directed attention to a legal opinion from Jack
Chenoweth, Legal Counsel, Division of Legal Services, on the
retroactive application of the proposed amendments to limitations
periods for assessments and collections of certain taxes due the
state. In his memo Mr. Chenoweth states, "A state may
retroactively amend or repeal time limitations that are set out in
its tax codes. While I cannot be certain of it, there is, in my
judgment, a high likelihood that the courts would not find
retroactive application of the proposed modifications of the
limitations statutes, as proposed by sec. 4 of Senate Bill 185, to
be unconstitutional."
Mr. Fink also directed attention to a memo from George Harrison,
Director of the Legislative Research Agency, relating to a research
request on resolution of oil taxation disputes in other states.
Questions asked of those oil producing states were: (1) What
statutes of limitation apply to actions by the state to recover
back taxes; (2) May the state increase its assessment of the amount
due from the taxpayer after an administrative proceedings is
underway; and (3) How long does it take to resolve disputes.
According to Mr. Harrison's memo, the three states contacted were
North Dakota, Wyoming and Texas. Essentially, these three states
use the same process to resolve disputes as Alaska. There is an
initial informal effort on the department and the taxpayer to
settle the matter; if informal conferences fail to reach agreement,
the taxpayer may go to a formal administrative hearing; failing
that, the taxpayer may turn to the court system.
Likewise, the three states showed little variation on matters of
statute of limitations, revision of assessments, and length of the
appeals process.
Mr. Fink noted that on the statute of limitations, North Dakota has
a statute on assessment of six years, but that will soon go to
three years as a result of a "taxpayers bill of rights" recently
adopted. In Wyoming it is five years. In Texas it is four years.
None of the states operate under any other limitation, such as a
maximum limitation on the time the state has to collect an
assessment from the date it was originally filed.
Mr. Fink said on the question of increasing an assessment during an
appeal, none of the tax departments in the three states are
prohibited from increasing an assessment against a taxpayer while
an appeal process was underway.
On the question of the length of time to resolve disputes, Mr.
Harrison said they found that in North Dakota a corporate income
tax case that began in 1980 was settled in July 1993. The average
length of time in North Dakota is five to six years. In Texas, it
is not unusual for a case to take 10 years to be settled, but their
normal length of time is five to six years, however, Texas noted
they have one severance tax case that has been ongoing for 19
years.
Number 096
ATTORNEY GENERAL BRUCE BOTELHO, Department of Law, said that in
recognition of concerns express by industry, specifically, the lack
of certainty and finality in the process of tax assessments and
appeals, Governor Hickel has proposed a committee substitute.
Attorney General Botelho stated the proposed committee substitute
would reaffirm for the past the consistent interpretation of the
state with regard to how both the statute of limitations for
assessments and for collection would operate. It would, however,
provide that effective for tax periods after December 31, 1993, a
five-year statute of limitations on assessments which would serve
as an absolute bar to further assessments by the Department of
Revenue. That way the taxpayer can know with certainty that no
assessments beyond that date would be issued by the department. On
the other hand, it adequately protects the state in the sense that
current staffing and expertise in the department leads them to feel
very comfortable that the work can be accomplished within that
five-year period.
Number 150
SENATOR RIEGER asked the Attorney General to elaborate how absolute
is an absolute bar in the context of differences of opinion versus
intentional concealment. ATTORNEY GENERAL BOTELHO answered that
there are probably three circumstances where making reference to an
absolute bar would, in fact, not be the case. One is if the
department were to discover that there had been some fraud in the
filing. That operates in any taxing structure to basically remove
a bar. A second circumstance would be if the taxpayer willingly
agreed to extend the statute of limitations. That is a practice
universally, and it has happened in the Alaska tax structure. The
third circumstance is where there has been some major adjustment in
a federal tax return under agreements between the state and the
federal government. That may, in fact, result in a revised return.
This would prevent, prospectively, the Department of Revenue, after
five years, from adding an additional issue for consideration
having discovered it after the statute had run.
Number 204
SENATOR KELLY asked if a statute of limitations has ever been
extended because of an allegation of fraud. ATTORNEY GENERAL
BOTELHO responded that he is not aware of any circumstance where
that has been the case.
Number 220
JOHN PILKINTON, Director, Oil and Gas Audit Division, Department of
Revenue, urged passage of SB 185 out of committee with overwhelming
endorsements, as well as passage by both bodies of the Legislature
this session.
Mr. Pilkinton said the personnel of the Oil and Gas Audit Division
has done an outstanding a job for the citizens of Alaska. The
audits of the oil and gas tax and royalties of the state are a
complex gargantuan task done with some of the largest companies in
the world. The clarifications proposed in SB 185 are reasonable
and equitable to the companies and to the Alaskan citizens.
The six-year collection statute is the least talked about portion
of the bill; it is simplest to understand, yet with the largest
exposure to the state. The existing law says six years from date
of assessment the tax must be collected by levy or by a proceeding
in court. The proposed clarification in wording provides for the
later of six years after assessment or six years after final
administrative or judicial appeal. Thus far, only one tax payer
has actually raised that as an issue.
He said the department believes that taxpayers exercise their full
rights to all levels of protest without premature levies and
collection actions by the division.
The proposed three-year clarification allows the division to
increase or decrease an unpaid assessment that was previously
issued within the three-year statute. He said the division needs
to be able to adjust its original assessment as new information
becomes available. The alternative language in the committee
substitute would still provide the retroactive feature, but would
put a cap on the future of five years to make any assessment.
Number 277
RONALD BITZER, Senior Appeals Officer, Oil and Gas Audit Division,
Department or Revenue, using a chart prepared by the department,
presented an overview on the audit and appeals process. He then
responded to several questions from the committee.
Number 036
SENATOR KELLY asked to what level have any of the tax cases have
been appealed. MR. BITZER answered that a separate accounting
case was appealed from the Alaska Supreme to the U.S. Supreme
Court. He added that the state won in that case.
Number 312
SENATOR SALO asked which choice is made more often regarding the
taxpayer going to an informal conference or a formal hearing. MR.
BITZER answered that the generally the taxpayer has chosen the
informal conference, but there have been a few instances in which
the taxpayer has directly gone to a formal hearing. MR. PILKINTON
added that a third thing they have done is they have signed
agreements with taxpayers whereby they start the informal
conference process, and at any time the taxpayer felt uncomfortable
with that process, they could immediately go to the formal process.
Number 322
SENATOR LEMAN asked if in the process it is possible for the
taxpayer to pay the assessment and appeal, and would that bar the
state from doing further assessments. MR. BITZER responded in the
affirmative, adding that the position that has been stated in the
past is the taxpayer could pay the assessment and file a claim for
refund. The claim for refund would then put a cap on the amount
that is at stake. He added that option is still available.
Number 381
SENATOR KELLY asked if any taxpayer has ever refused to extend an
agreement that the department has requested. MR. BITZER answered
that in the early years the taxpayers would automatically extend
the statute of limitations. In most recent years, they have had
taxpayers who have refused to extend the statute of limitations,
which, he said, does cause problems when going through a three-year
cycle. In 1979 Phillips Petroleum refused auditor's access to the
documents and litigation ensued. The case was resolved in the
Superior Court in September of 1989 in the state's favor, which
granted the auditors the rights to review the company's records and
conduct audits.
Number 522
SENATOR RIEGER asked how many tax returns per taxpayer they receive
each year. MR. PILKINTON related that from 1990 to 1992, they had
11,257 filings for approximately 19 producers. In addition, there
were 3,709 amended filings by the producers.
SENATOR KELLY asked how large a staff the division has working in
this area, and MR. PILKINTON responded there are 21 people in the
appeals section dealing with these cases.
TAPE 94-31, SIDE B
Number 020
MR. PILKINTON, using charts, summarized some key statistics he felt
would be useful to the committee in their consideration of the
legislation, and those were: income tax and production taxes paid;
tax dollars collected; number of audits issued by year; number of
assessments issued; number of taxpayers with cases in court; number
of taxpayers with open cases; and state auditors and appeals staff
that have worked in collecting the taxes.
He also pointed out that one line that was not on the charts was
that of 35 audits issued, one case is still in court and two cases
are still open, thus, 32 cases have been settled by the state.
Number 035
SENATOR SALO noted that in reviewing information from other states
relating to their collection of taxes, it appears that the length
of time that it takes to resolve a tax dispute is directly
proportional to the size of that case, and she asked if that was
true in Alaska as well. MR. PILKINTON acknowledged that was
correct.
Number 042
PAUL SULLIVAN, General Tax Counsel, Exxon Company, U.S.A.,
testified in opposition to SB 185, as well as the Administration's
proposed committee substitute. The following are excerpts from
that testimony:
"Retroactive tax legislation is wrong. Taxpayers have a right
to rely on existing laws to conduct their business and to be
protected from stale claims. They also have right to timely and
uniform administration of the tax laws on assessment practices and
to procedural fairness. SB 185 will violate these rights and will
change the "agreed upon terms" Governor Hickel refers to when he
talks about the mutually beneficial partnership between the oil
industry and the state."
"By putting current taxpayers in jeopardy of increased tax
claims for years long since passed, this legislation sends a
hostile message not only to current taxpayers, but to all potential
investors in Alaska. Those investors would have to ask themselves
difficult questions about the business climate and stability they
could expect once they've invested their money. Tax stability and
certainty are important considerations when companies invest for
the long term. Jurisdictions which provide stable business
environments will be the ones who most likely will gain those
investment dollars."
"There seems to be some misconception that oil and gas
taxpayers have somehow not paid the taxes they legally owe to the
State of Alaska. This is simply not true. Speaking for Exxon
alone, we have paid approximately 4 billion dollars in income and
oil and gas production taxes to the State of Alaska from 1976
through year-end 1992, and we believe those payments were
consistent with our tax liability under law. The entire industry
has paid in excess of 18 billion dollars in corporate income and
oil and gas production taxes for that same period. The total
payments made to the state by the oil industry for that period are
significantly higher when you include royalties and other tax
payments to the state."
"You've heard various claims from the Administration on the
amount at stake in time-barred claims if SB 185 isn't enacted, and
that the state will not collect legitimate tax dollars owed. The
amount the Department of Revenue claims is any number it chooses
and it changes its numbers frequently. I would like to point out
that many of the tax assessments issued to Exxon have been timely
issued and are not barred by the statute of limitations.
Nonetheless, Exxon has objected to those assessments on the merits
of the audit issues raised and is attempting in good faith to
resolve those issues with the Department of Revenue and the
Department of Labor."
"As I said last year and I will say it again, even if SB 185
were only applied prospectively, which you can clearly do without
constitutional challenge, it would still be bad law. It would
remove any incentive for the department to resolve tax cases while
subjecting taxpayers to new and overreaching powers. The state
would thereby lose, the taxpayers would lose, only the bureaucrats
would gain. SB 185 is, in fact, a bureaucrat's dream-come-true."
"Taxpayers and the state would be unable to close out tax
years in a reasonable period. The overburdened judicial system
would be further burdened with more legal challenges to the
assessments and a constitutional challenge to SB 185's retroactive
application. Finally, the department would be empowered to create
an unlimited period for tax audits simply by continuing to issue
excessively high assessments."
"Finally, I'd like to address another misunderstanding that
has been perpetuated by the prior testimony of Mr. Cole and others
that Texas has provisions in its statute of limitations law which
are virtually identical to what is being proposed before you in SB
185. That is just not true. The Texas statutes provide in Section
111.207(b) that when a taxpayer files a protest against an
assessment, the statute of limitations is suspended, but only for
the amount of the tax at issue, not for other items, not for
subsequent assessments. The Texas statutes do not allow for an
increase of the assessments during the taxpayer's protest of
assessments. Furthermore, it has been our experience in the lower
48 states that once a state has issued an assessment for a
particular year, they do not increase that assessment if contested.
It is either sustained in total or amended downward. And, most
importantly, no state has ever changed their tax laws retroactively
as SB 185 would do."
Mr. Sullivan also directed attention to a chart titled "Chronology
of Alaska Income Tax for 1978, as well as a five-page handout, and
he discussed Exxon's experiences with their 1978 tax year.
In his concluding comments, Mr. Sullivan pointed out that Exxon
has, in every instance where the Department of Revenue has
requested an extension, they have given it.
Number 450
SENATOR KELLY referred to Mr. Sullivan's statement that once the
taxpayer protests or pays and files a refund claim, the department
would be free to go on issuing new or revised assessments forever.
He asked if that was also true in the new committee substitute.
MR. SULLIVAN answered that under the retroactive piece they would
be open forever and ever. The five-year comes into play for tax
years beginning December 1993. That would be the appropriate
statute of limitations unless it is changed retroactively sometime
in the future. He questioned what's different between the five-
year statute for the future and the three-year statute the state
currently has for the past. He concluded nothing is different,
other than somebody now is saying they've got a problem with the
past, so lets change it. He added that they have no issues
involved with the six-year collection statute.
Number 475
SENATOR LINCOLN referred to Exxon's 1978 tax case discussed by Mr.
Sullivan and she asked why they went through an informal process
for nine years before going to a formal hearing. MR. SULLIVAN
answered that everybody wants to attempt to resolve things at the
lowest level. When going to formal conference, in the State of
Alaska you do not get a trial de novo when going into the Superior
Court. In other words, the judge does not hear all of the
testimony. The record for the Superior Court is set in the formal
conference hearing, so the formal conference hearing is much closer
to litigation than negotiation.
Number 531
There being no further questions from the committee, SENATOR KELLY
stated the proposed committee substitute would be circulated to the
various interested parties in the industry and SB 185 would be back
before the committee at a later date.
There being no further business to come before the committee, the
meeting was adjourned at 3:30 p.m.
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