Legislature(2005 - 2006)

03/22/2006 03:40 PM RES


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03:40:21 PM Start
03:41:31 PM SB305
03:58:01 PM Dan Dickinson, Consultant to the Governor
05:32:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                       ALASKA STATE LEGISLATURE                                                                               
                  SENATE RESOURCES STANDING COMMITTEE                                                                         
                            March 22, 2006                                                                                      
                               3:40 p.m.                                                                                        
                                                                                                                                
   MEMBERS PRESENT                                                                                                            
                                                                                                                                
   Senator Thomas Wagoner, Chair                                                                                                
   Senator Ralph Seekins, Vice Chair                                                                                            
   Senator Ben Stevens                                                                                                          
   Senator Fred Dyson                                                                                                           
   Senator Bert Stedman                                                                                                         
   Senator Kim Elton                                                                                                            
   Senator Albert Kookesh                                                                                                       
                                                                                                                                
   MEMBERS ABSENT                                                                                                             
                                                                                                                                
   All members present                                                                                                          
                                                                                                                                
   COMMITTEE CALENDAR                                                                                                         
                                                                                                                                
   SENATE BILL NO. 305                                                                                                          
   "An Act repealing the oil  production tax and gas production  tax                                                            
   and providing for a  production tax on the  net value of oil  and                                                            
   gas; relating to the relationship of the production tax to  other                                                            
   taxes; relating to the dates tax payments and surcharges are  due                                                            
   under AS 43.55;  relating to  interest on  overpayments under  AS                                                            
   43.55; relating to the  treatment of oil  and gas production  tax                                                            
   in a producer's  settlement with the  royalty owner; relating  to                                                            
   flared gas, and to oil and gas  used in the operation of a  lease                                                            
   or property, under AS 43.55; relating to the prevailing value  of                                                            
   oil or gas under AS 43.55; providing for tax credits against the                                                             
   tax due  under AS  43.55 for  certain expenditures,  losses,  and                                                            
   surcharges; relating to statements or other information  required                                                            
   to be filed with or furnished  to the Department of Revenue,  and                                                            
   relating to  the penalty  for failure  to file  certain  reports,                                                            
   under AS  43.55; relating  to  the powers  of the  Department  of                                                            
   Revenue, and to  the disclosure of  certain information required                                                             
   to be furnished  to the  Department of Revenue,  under AS  43.55;                                                            
   relating  to   criminal   penalties  for   violating   conditions                                                            
   governing access to and use of confidential information  relating                                                            
   to the oil  and gas production  tax; relating to  the deposit  of                                                            
   money collected  by the  Department of  Revenue under  AS 43.55;                                                             
   relating to the calculation  of the gross value  at the point of                                                             
   production of oil or  gas; relating to  the determination of  the                                                            
   net value of  taxable oil and  gas for purposes  of a  production                                                            
   tax on the net value of oil and gas; relating to the  definitions                                                            
of 'gas,' 'oil,' and certain other terms for purposes of AS                                                                     
43.55; making conforming amendments; and providing for an                                                                       
effective date."                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 305                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
02/21/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (S)       RES, FIN                                                                                               
02/22/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/22/06       (S)       Heard & Held                                                                                           
02/22/06       (S)       MINUTE(RES)                                                                                            
02/23/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/23/06       (S)       Heard & Held                                                                                           
02/23/06       (S)       MINUTE(RES)                                                                                            
02/24/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/24/06       (S)       Heard & Held                                                                                           
02/24/06       (S)       MINUTE(RES)                                                                                            
02/25/06       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
02/25/06       (S)       -- Reconvene from 02/24/06 --                                                                          
02/25/06       (H)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
02/25/06       (S)       Heard & Held                                                                                           
02/25/06       (S)       MINUTE(RES)                                                                                            
02/27/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/27/06       (S)       Heard & Held                                                                                           
02/27/06       (S)       MINUTE(RES)                                                                                            
02/28/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/28/06       (S)       Heard & Held                                                                                           
02/28/06       (S)       MINUTE(RES)                                                                                            
03/01/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/01/06       (S)       Heard & Held                                                                                           
03/01/06       (S)       MINUTE(RES)                                                                                            
03/02/06       (S)       RES AT 1:30 PM BUTROVICH 205                                                                           
03/02/06       (S)       Heard & Held                                                                                           
03/02/06       (S)       MINUTE(RES)                                                                                            
03/02/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/02/06       (S)       Heard & Held                                                                                           
03/02/06       (S)       MINUTE(RES)                                                                                            
03/03/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/03/06       (S)       -- Meeting Canceled --                                                                                 
03/04/06       (S)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
03/04/06       (S)       Presentation by Legislative Consultants                                                                
03/06/06       (S)       RES AT 3:30 PM SENATE FINANCE 532                                                                      
   03/06/06       (S)       Heard & Held                                                                                        
   03/06/06       (S)       MINUTE(RES)                                                                                         
   03/07/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/07/06       (S)       Heard & Held                                                                                        
   03/07/06       (S)       MINUTE(RES)                                                                                         
   03/08/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/08/06       (S)       -- Meeting Canceled --                                                                              
   03/09/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/09/06       (S)       -- Meeting Canceled --                                                                              
   03/10/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/10/06       (S)       -- Meeting Canceled --                                                                              
   03/11/06       (H)       RES AT 10:00 AM CAPITOL 106                                                                         
   03/11/06       (H)       -- Meeting Canceled --                                                                              
   03/13/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/13/06       (S)       Heard & Held                                                                                        
   03/13/06       (S)       MINUTE(RES)                                                                                         
   03/14/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/14/06       (S)       Heard & Held                                                                                        
   03/14/06       (S)       MINUTE(RES)                                                                                         
   03/15/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/15/06       (S)       -- Testimony <Invitation Only> --                                                                   
   03/16/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/16/06       (S)       -- Meeting Canceled --                                                                              
   03/17/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/17/06       (S)       Heard & Held                                                                                        
   03/17/06       (S)       MINUTE(RES)                                                                                         
   03/18/06       (H)       RES AT 10:00 AM CAPITOL 124                                                                         
   03/18/06       (H)       -- Meeting Canceled --                                                                              
   03/19/06       (S)       RES AT 1:00 PM BUTROVICH 205                                                                        
   03/19/06       (S)       Heard & Held                                                                                        
   03/19/06       (S)       MINUTE(RES)                                                                                         
   03/20/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/20/06       (S)       Heard & Held                                                                                        
   03/20/06       (S)       MINUTE(RES)                                                                                         
   03/21/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
   03/21/06       (S)       -- Meeting Canceled --                                                                              
   03/22/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                        
                                                                                                                                
   WITNESS REGISTER                                                                                                           
                                                                                                                                
   MARY JACKSON                                                                                                                 
   Staff to Senator Wagoner                                                                                                     
   Alaska State Capitol                                                                                                         
   Juneau, AK  99801-1182                                                                                                       
   POSITION STATEMENT: Presented amendments to SB 305.                                                                        
                                                                                                                                
   JOE BALASH                                                                                                                   
Staff to the Legislative Budget and Audit Committee                                                                             
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION  STATEMENT: Commented  on  Administrative Amendments  to                                                             
CSSB 305(RES), Version Y.                                                                                                       
                                                                                                                                
ROBERT MINTZ, Assistant Attorney General                                                                                        
Department of Law                                                                                                               
PO Box 110300                                                                                                                   
Juneau, AK  99811-0300                                                                                                          
POSITION  STATEMENT: Commented  on  Administrative Amendments  to                                                             
CSSB 305(RES), Version Y.                                                                                                       
                                                                                                                                
ROBYNN WILSON, Director                                                                                                         
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION  STATEMENT: Commented  on  Administrative Amendments  to                                                             
CSSB 305(RES), Version Y.                                                                                                       
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to  order at 3:40:21 PM.  Present were Senators                                                             
Ben Stevens, Stedman, Seekins, Kookesh, Elton and Chair Wagoner.                                                                
                                                                                                                                
                SB 305-OIL AND GAS PRODUCTION TAX                                                                           
                                                                                                                                
CHAIR THOMAS WAGONER announced SB  305 to be up for consideration                                                               
and  that the  committee would  consider amendments.  [In packets                                                               
and under  discussion was a  proposed committee  substitute (CS),                                                               
Version Y, labeled 24-GS2052\Y,  Chenoweth, 3/16/06. Hereafter it                                                               
will be referred to as "Version Y".]                                                                                            
                                                                                                                                
3:41:31 PM                                                                                                                    
MARY JACKSON,  Staff to  Senator Wagoner,  said she  arranged the                                                               
amendments   according   to    whether   they   were   technical,                                                               
administrative,  or substantive  issues. She  presented Technical                                                               
Amendment 1:                                                                                                                    
                                                                                                                                
                                                     24-GS2052\Y.34                                                             
                                                         Chenoweth                                                              
                                                                                                                                
                      TECHNICAL AMENDMENT 1                                                                                 
                                                                                                                                
OFFERED IN THE SENATE                                                                                                           
        TO:  CSSB 305(RES), Draft Version "Y"                                                                                   
                                                                                                                                
   Page 5, line 19, following "owner;":                                                                                         
        Insert "and"                                                                                                            
                                                                                                                                
   Page 5, line 20:                                                                                                             
        Delete "except as provided in (4) of this subsection,"                                                                  
                                                                                                                                
   Page 5, line 26:                                                                                                             
        Delete "; and"                                                                                                          
        Insert "."                                                                                                              
                                                                                                                                
   Page 5, lines 27 - 29:                                                                                                       
        Delete all material.                                                                                                    
                                                                                                                                
   Page 7, lines 16 - 23:                                                                                                       
        Delete all material.                                                                                                    
        Insert   "Notwithstanding   any   contrary   provision    of                                                            
   AS 43.05.280, interest on an overpayment  is allowed only from a                                                             
   date that  is 90  days after  the  last day  of the  third  month                                                            
   following the  calendar quarter  of production,  as described  in                                                            
   this subsection, and interest is  not allowed if the overpayment                                                             
   was refunded within the 90-day period. In addition, the  producer                                                            
   shall  comply  with  the  requirements  of  AS 43.55.030(a)   and                                                            
   43.55.030(e). In this subsection,  "calendar quarter" means each                                                             
   of   the   three-month   periods   ending   March 31,    June 30,                                                            
   September 30, and December 31."                                                                                              
                                                                                                                                
   Page 8, line 21, following "is":                                                                                         
        Insert "produced and"                                                                                               
                                                                                                                                
   Page 11, lines 7 - 23:                                                                                                       
        Delete all material and insert:                                                                                         
             "(e)  A person to which a transferable tax credit                                                                  
        certificate  is  issued  under  (d)  of  this  section   may                                                            
        transfer  the   certificate  to   another  person,   and   a                                                            
        transferee may further transfer the certificate. Subject  to                                                            
        the limitations set out  in (a) - (c)  of this section, and                                                             
        notwithstanding any  action  the department  may  take  with                                                            
        respect to  the applicant  under (f)  of this  section, the                                                             
        owner of a certificate may apply the credit or a portion of                                                             
        the credit shown on the  certificate only against a tax  due                                                            
        under  AS 43.55.011(e).  However,  a   credit  shown  on  a                                                             
        transferable tax credit  certificate may not  be applied  to                                                            
        reduce a transferer's  total tax  due under  AS 43.55.011(e)                                                            
        on oil and gas produced during a calendar year to less than                                                             
        80 percent of the  tax that would  otherwise be due  without                                                            
     applying  that credit.  Any  portion of  a  credit not  used                                                               
     under this subsection may be applied in a later period."                                                                   
                                                                                                                                
Reletter the following subsections accordingly.                                                                                 
                                                                                                                                
Page 12, line 21:                                                                                                               
     Delete "(A)"                                                                                                               
                                                                                                                                
Page 12, line 22, following "service":                                                                                          
     Insert "economically"                                                                                                      
                                                                                                                                
Page 12, line 24:                                                                                                               
     Delete "similar"                                                                                                           
     Insert "any successor"                                                                                                     
     Delete "; or"                                                                                                              
     Insert "."                                                                                                                 
                                                                                                                                
Page 12, lines 25 - 29:                                                                                                         
     Delete all material.                                                                                                       
                                                                                                                                
Page 13, line 2:                                                                                                                
     Delete "(i)"                                                                                                               
     Insert "(h)"                                                                                                               
                                                                                                                                
Page 15, lines 4 - 7:                                                                                                           
     Delete all material and insert:                                                                                            
          (e)  In addition to other required information, the                                                                   
     producer shall file  a statement, on or before  the last day                                                               
     of each calendar quarter of  a year, showing any adjustments                                                               
     or corrections  to the statements  that were  required under                                                               
     (a) of this section to be  filed for the three months of the                                                               
     preceding  calendar year  during which  the oil  or gas  was                                                               
     produced. In this subsection,  "calendar quarter" means each                                                               
     of  the   three-month  periods  ending   March 31,  June 30,                                                               
     September 30, and December 31."                                                                                            
                                                                                                                                
Page 16, line 26:                                                                                                               
     Delete "or"                                                                                                            
                                                                                                                                
Page 16, line 29:                                                                                                               
     Delete "a new subsection"                                                                                                  
     Insert "new subsections"                                                                                                   
                                                                                                                                
Page 17, line 19:                                                                                                               
     Delete "(A)"                                                                                                               
                                                                                                                                
Page 17, line 21:                                                                                                               
        Delete ";"                                                                                                              
        Insert "."                                                                                                              
                                                                                                                                
   Page 17, lines 22 - 23:                                                                                                      
        Delete all material and insert:                                                                                         
             "(e)  A formula prescribed by the department under (d)                                                             
        of this section may not incorporate a reference to royalty                                                              
        value, royalty valuation methodology, or royalty settlement                                                             
        agreement."                                                                                                             
                                                                                                                                
   Page 19, line 3:                                                                                                             
        Delete "an"                                                                                                             
                                                                                                                                
   Page 19, line 17:                                                                                                            
        Delete "the operator or a working interest owner"                                                                       
        Insert "a producer that is an operator"                                                                                 
                                                                                                                                
   Page 20, line 6:                                                                                                             
        Delete "of capital assets"                                                                                              
                                                                                                                                
   Page 21, line 3, following "service":                                                                                        
        Insert "economically"                                                                                                   
                                                                                                                                
   Page 21, line 5, following "similar":                                                                                        
        Insert "regulatory"                                                                                                     
                                                                                                                                
   Page 24, line 4, following "Code),":                                                                                         
        Insert "as amended,"                                                                                                    
                                                                                                                                
                                                                                                                                
   MS. JACKSON explained that Technical Amendment 1 had three  notes                                                            
   to go with it:                                                                                                               
                                                                                                                                
     1. Page 2 - to insert Technical Amendment 1 after the second                                                               
        "is"                                                                                                                    
     2. Page 2 - line 13 - should read "transferee's" (not                                                                      
        "transferers")                                                                                                          
     3. Page 3 - lines 8 - 15 - Administration is checking on                                                                   
        whether it still needed this section (item 6)                                                                           
                                                                                                                                
   MS. JACKSON  also noted  that "page  2, line  21", [of  Technical                                                            
   Amendment 1] should read "page 12,  line 21". Back to page 1  she                                                            
   said lines  1  - 12  pertained  to  Topic 4  of  the  committee's                                                            
   "Roadmap," which  related  to  the deletion  of  tax  on  royalty                                                            
   language. She explained that the deleted language authorized the                                                             
   commissioner to establish  the tax and  the commissioner pointed                                                             
   out that tax creation was a  legislative function. Lines 1 and  2                                                            
and lines 6 -  12 on page 1 were both  technical changes; lines 4                                                               
and 5  deleted reference to  the previous subsection. Lines  14 -                                                               
22 related  to Item  6 of the  committee's Roadmap  regarding the                                                               
safe  harbor  provision  that  was  in  the  original  bill.  The                                                               
original bill  was set at  90 percent. This language  was revised                                                               
to read 95 percent with a true up on a quarterly basis.                                                                         
                                                                                                                                
On page  2 [of  Technical Amendment  1], lines 1  - 2  related to                                                               
Item 7 of the Roadmap regarding oil  and gas sold and oil and gas                                                               
not sold.  "Produced" was put in  front of one section,  but that                                                               
language was  not followed  through in  the second  section. This                                                               
amendment does that by inserting language  on page 8, line 21 [of                                                               
Version Y] that would then read:  "If oil or gas is produced, but                                                               
not sold, or if oil or gas is produced and sold".                                                                               
                                                                                                                                
On page  2 [of Technical Amendment  1], lines 4 -  16, dealt with                                                               
Item 9,  an error  in language  suggested by  AOGA. Specifically,                                                               
line 13  on page 11  changed "transferer's" to  "transferee's" in                                                               
Version  Y. It  also corrected  Item  10, which  was an  improper                                                               
insertion   of  House   language  into   the  Senate   bill.  The                                                               
subsections need to be renumbered accordingly.                                                                                  
                                                                                                                                
3:50:46 PM                                                                                                                    
Page 2, line 20, [of Technical  Amendment 1] referred to Items 13                                                               
and 22 of the Roadmap.  The administration expressed concern that                                                               
the   term    "similar   regulatory"   was    overly-broad.   So,                                                               
"economically"  was inserted  in one  area, which  administration                                                               
agreed with. A  second change on line 26  [of Technical Amendment                                                               
1] deleted  "similar" and  inserted "any  successor" on  page 12,                                                               
line 24,  of Version  Y. Ms. Jackson  explained that  Ms. Wilson,                                                               
director of  the Tax  Division, said this  language needed  to be                                                               
clarified  to   mean  the  successor   body  to   the  Regulatory                                                               
Commission of Alaska (RCA).                                                                                                     
                                                                                                                                
3:52:33 PM                                                                                                                    
Page 3, lines 1 - 2, of  Technical Amendment 1 related to Item 14                                                               
on the Roadmap.  The Chairman recommended deleting lines  25 - 29                                                               
on  page 12  of Version  Y. Page  3, lines  4 -  6 [of  Technical                                                               
Amendment  1], were  drafting  insertions  to correct  deletions.                                                               
Page 3, line  8 [of Technical Amendment 1], related  to Item 6 on                                                               
the Roadmap and the administration now supported it.                                                                            
                                                                                                                                
3:55:03 PM                                                                                                                    
SENATOR  SEEKINS   asked  how  a   person  filed   the  quarterly                                                               
statements mentioned on  page 3, line 13,  of Technical Amendment                                                               
1.                                                                                                                              
                                                                                                                                
   3:55:42 PM                                                                                                                 
   ^Dan Dickinson, Consultant to the Governor                                                                                 
                                                                                                                                
   DAN DICKINSON, CPA, Consultant to the Governor, explained that  a                                                            
   quarterly true  up was  required in  the original  bill and  this                                                            
   language he addressed  situations in which  a person didn't  have                                                            
   an actual tax obligation at the end of a quarter. He would  still                                                            
   have to  file  for the  true  up,  but the  language  imposed  no                                                            
   additional obligation.                                                                                                       
                                                                                                                                
   SENATOR SEEKINS pointed out that language on page 3, line 13, of                                                             
   Technical Amendment 1, required a quarterly true up and  referred                                                            
   back to the previous calendar year, not to the previous quarter.                                                             
                                                                                                                                
   3:58:01 PM                                                                                                                 
   MR. DICKINSON admitted that Senator  Seekins caught a glitch.  He                                                            
   suggested inserting  "calendar quarter"  and deleting  "year"  on                                                            
   page 3, line 13 of Technical Amendment 1.                                                                                    
                                                                                                                                
   CHAIR  WAGONER  said  they  would  treat  that  as  an  editorial                                                            
   correction. There were no objections.                                                                                        
                                                                                                                                
   3:59:23 PM                                                                                                                 
   MS. JACKSON  said  page 3,  line  17, of  Technical  Amendment  1                                                            
   related to Item  15 that  deleted "or" on  page 16,  line 26,  of                                                            
   Version  Y.   She  said   after  considerable   discussion,   the                                                            
   administration persuaded the chairman  to remove that word.  Page                                                            
   3, line 20, of Technical  Amendment 1, was a drafting  correction                                                            
   to page 16, line 29, of Version Y.                                                                                           
                                                                                                                                
   4:00:46 PM                                                                                                                 
   Page 3, line 24, of Technical Amendment 1, related to Item 17  of                                                            
   the Roadmap  that concerned  how the  valuation was  established.                                                            
   She explained there  was a lot  of discussion on  whether or  not                                                            
   royalty settlement agreements should be a basis.                                                                             
                                                                                                                                
   4:01:46 PM                                                                                                                 
   SENATOR BEN STEVENS requested that this item be removed from  the                                                            
   Technical Amendment  category and  be  put into  the  Substantive                                                            
   Amendment category, because it concerned a substantive change in                                                             
   policy. There were no objections.                                                                                            
                                                                                                                                
   MS. JACKSON followed up that language  on page 3, lines 24 -  31,                                                            
   and page 4, lines  1 - 4, of  Technical Amendment 1 would  become                                                            
   new Substantive Amendment 5.                                                                                                 
                                                                                                                                
   4:03:11 PM                                                                                                                 
SENATOR BEN STEVENS asked to go back  to page 17 of Version Y and                                                               
remarked that two components refer  to two different subchapters.                                                               
One  relates  to  AS  45.55.160  and  the  other  relates  to  AS                                                               
45.55.150.  One has  to do  with transition  investments and  the                                                               
other has to do with valuation.                                                                                                 
                                                                                                                                
CHAIR WAGONER said  he would check those references  to make sure                                                               
they were correct.                                                                                                              
                                                                                                                                
4:05:27 PM                                                                                                                    
MS. JACKSON  went to page  19, lines 3 and  4, of Version  Y, and                                                               
read the end: "or  producing an oil or gas from  a deposit of oil                                                               
or  gas". Either  "from  a" or  "an" needed  to  be removed.  The                                                               
drafter determined  it would be  appropriate to remove  "an". The                                                               
net result is that the line  would read: "or producing oil or gas                                                               
from a deposit of oil or gas".                                                                                                  
                                                                                                                                
4:06:17 PM                                                                                                                    
Page 4,  line 9, of Technical  Amendment 1 referenced Item  20 of                                                               
the  Roadmap  that  was requested  by  AOGA.  The  administration                                                               
agreed. The changes  delete: "the operator or  a working interest                                                               
owner" and  insert "a producer  that is an operator".  The result                                                               
of it  would be on page  19, lines 16  and 17, of Version  Y that                                                               
would now  read: "(2) the  Department of Revenue may  authorize a                                                               
producer   that  is   an   operator  to   treat   as  its   lease                                                               
expenditures...."                                                                                                               
                                                                                                                                
4:07:19 PM                                                                                                                    
Page  4, line  13, of  Technical Amendment  1 referenced  Roadmap                                                               
Item 21 and  was requested by the administration.  It deleted "of                                                               
capital assets" on bill page 20, line 6, of Version Y.                                                                          
                                                                                                                                
4:07:59 PM                                                                                                                    
Page 4, lines 16 - 23,  of Technical Amendment 1 was requested by                                                               
the  department  and  corrected conflicting  language  about  the                                                               
regulatory  board  on  page  2,  lines  23  -  31,  of  Technical                                                               
Amendment 1.                                                                                                                    
                                                                                                                                
4:10:15 PM                                                                                                                    
CHAIR WAGONER asked if definitions  would be inserted on page 19,                                                               
line 29, of Version Y.                                                                                                          
                                                                                                                                
MS. JACKSON replied  yes; but those definitions would  show up in                                                               
the Administrative Amendments group.                                                                                            
                                                                                                                                
4:11:13 PM                                                                                                                    
SENATOR SEEKINS moved to adopt Technical Amendment 1.                                                                           
                                                                                                                                
   SENATOR BEN STEVENS objected for a point of order. The  committee                                                            
   had not adopted the working draft yet.                                                                                       
                                                                                                                                
   4:11:44 PM                                                                                                                 
   SENATOR SEEKINS moved to adopt  CSSB 305(RES), Version Y, as  the                                                            
   working draft.                                                                                                               
                                                                                                                                
   SENATOR BEN  STEVENS objected  saying he  didn't agree  with  the                                                            
   rates that were proposed in CSSB 305(RES), Version Y.                                                                        
                                                                                                                                
   4:12:39 PM                                                                                                                 
   SENATOR SEEKINS  pointed out  that they  needed to  adopt the  CS                                                            
   because the amendments wouldn't work  with the original bill.  He                                                            
   looked upon the  bill as a  work in process  that was subject  to                                                            
   amendment and not the final product of the committee.                                                                        
                                                                                                                                
   4:13:10 PM                                                                                                                 
   SENATOR STEDMAN added  that the  bills and  amendments would  all                                                            
   get ample debate the committee needed a forum to work from.                                                                  
                                                                                                                                
   4:13:36 PM                                                                                                                 
   SENATOR BEN STEVENS suggested that they could adopt the  original                                                            
   bill and  move  the  substantive amendments.  He  maintained  his                                                            
   objection.                                                                                                                   
                                                                                                                                
   4:14:13 PM                                                                                                                 
   SENATOR SEEKINS said if  the committee adopted  the CS, it  would                                                            
   be subject to even further amendments.                                                                                       
                                                                                                                                
   CHAIR WAGONER agreed  and asked  for a roll  call vote.  Senators                                                            
   Stedman and  Ben  Stevens  voted nay;  Senators  Elton,  Kookesh,                                                            
   Seekins and Wagoner voted yea.  Senator Stedman changed his  vote                                                            
   from nay to yea;  so, by a  vote of five yeas  and one nay,  CSSB                                                            
   305(RES), Version Y, was adopted.                                                                                            
                                                                                                                                
   4:15:51 PM                                                                                                                 
   SENATOR SEEKINS moved to adopt Technical Amendment 1.                                                                        
                                                                                                                                
   SENATOR BEN STEVENS objected. He  acknowledged all the work  that                                                            
   had gone  into the  amendment, but  he stated  that some  of  the                                                            
   changes in  Technical Amendment  1  were substantive  changes  to                                                            
   policy. He  had  anticipated  debate on  the  substantive  policy                                                            
   changes as  to  why  it  was changed.  With  that  statement,  he                                                            
   removed his objection.                                                                                                       
                                                                                                                                
SENATOR  SEEKINS said  that he  agreed with  Senator Ben  Stevens                                                               
that  some of  the  changes  in Technical  Amendment  1 may  have                                                               
crossed over into the substantive  area, but his intent on making                                                               
the motion  was to come  up with  an integrated document  that he                                                               
could further consider.                                                                                                         
                                                                                                                                
4:18:32 PM                                                                                                                    
SENATOR STEDMAN agreed with that statement.                                                                                     
                                                                                                                                
SENATOR BEN STEVENS withdrew his objection to adopting Technical                                                                
Amendment 1 and without further objection, it was adopted.                                                                      
                                                                                                                                
4:18:44 PM                                                                                                                    
MS. JACKSON went on to present Technical Amendment 2 that was                                                                   
requested by the administration as follows:                                                                                     
                                                                                                                                
                                                        24G-2                                                                   
                                                     3/22/2006                                                                  
                                                  (10:53 A.M.)                                                                  
                                                                                                                              
                      TECHNICAL AMENDMENT 2                                                                                 
                                                                                                                                
     OFFERED IN THE SENATE RESOURCES                                                                                            
            COMMITTEE                                                                                                           
     TO:  CSSB 305(RES) (24-GS2052\Y) (3/16/06 Work Draft: Chenoweth)                                                           
                                                                                                                                
     Page 29, following line 28:                                                                                                
          Insert the following material:                                                                                        
        "(e)  Notwithstanding any contrary provision of                                                                         
     AS 43.55.020(a), as  repealed and reenacted by  sec. 10                                                                    
     of this Act, or of  AS 43.55.020(g), enacted by sec. 15                                                                    
     of  this Act,  for oil  and  gas produced  on or  after                                                                    
     April 1, 2006,  and before the  first day of  the first                                                                    
     month  that   begins  at  least  180   days  after  the                                                                    
     effective date of secs. 10 and 15 of this Act,                                                                             
               (1)  the amount of the taxes that would have                                                                     
     been levied  upon the producer  under AS 43.55,  as the                                                                    
     provisions of  that chapter read on  March 31, 2006, is                                                                    
     due on the  last day of each calendar month  on the oil                                                                    
     and gas that  was produced from each  lease or property                                                                    
     during the preceding month;                                                                                                
               (2)  the portion, if any, of the taxes                                                                           
     levied under  AS 43.55.011(a), as amended by  sec. 5 of                                                                    
     this  Act, and  under  AS 43.55.011(e),  (f), and  (g),                                                                    
     enacted by  sec. 7  of this  Act, that  remains unpaid,                                                                    
     net of  any credits applied  as allowed by law,  is due                                                                    
     on  the last  day of  the second  month that  begins at                                                                    
     least 180 days after the  effective date of secs. 5 and                                                                    
        7 of this Act.                                                                                                          
             (f)  Notwithstanding any contrary provision of                                                                     
        AS 43.55.030(a), as  amended by  sec. 18  of this  Act,                                                                 
        for oil and  gas produced  on or  after April 1,  2006,                                                                 
        and before  the  first  day of  the  first  month  that                                                                 
        begins at least  180 days after  the effective date  of                                                                 
        sec. 18 of this  Act, the person  paying the tax  shall                                                                 
        file with the  Department of  Revenue, at  the time  an                                                                 
        amount of tax is due                                                                                                    
                  (1)  under (e)(1) of this section, the                                                                        
        statement required  under  former  AS 43.55.030(a),  as                                                                 
        that subsection read on March 31, 2006; and                                                                             
                  (2)  under (e)(2) of this section, the                                                                        
        statements required under  AS 43.55.030(a), as  amended                                                                 
        by sec. 18 of this Act.                                                                                                 
             (g)  For purposes of taxes to be calculated and                                                                    
        due under (e)(1) of this  section and statements to  be                                                                 
        filed under (f)(1)  of this  section, regulations  that                                                                 
        were  adopted  by  the  Department  of  Revenue   under                                                                 
        AS 43.55, as  the provisions  of that  chapter read  on                                                                 
        March 31, 2006, and  that were in  effect on that  date                                                                 
        apply to those taxes and statements."                                                                                   
                                                                                                                                
        Page 29, line 31, following "REGULATIONS":                                                                              
             Delete "."                                                                                                         
             Insert "AND RETROACTIVITY OF REGULATIONS. (a)"                                                                     
                                                                                                                                
        Page 30, following line 3:                                                                                              
             Insert the following material:                                                                                     
             "(b)  Notwithstanding any contrary provision of                                                                    
        AS 44.62.240, a  regulation adopted  by the  Department                                                                 
        of Revenue to implement,  interpret, make specific, or                                                                  
        otherwise carry  out the  provisions  of secs.  5 -  8,                                                                 
        10 - 13, 15 - 18, 20, 24  - 35, and 37 of this Act  may                                                                 
        apply  retroactively  as  of  April 1,  2006,  if   the                                                                 
        Department  of  Revenue  expressly  designates  in  the                                                                 
        regulation that  the regulation  applies  retroactively                                                                 
        to that date."                                                                                                          
                                                                                                                                
   MR. DICKINSON explained  that Technical Amendment  2 was written                                                             
   because there wouldn't be enough  time between when the bill  was                                                            
   introduced and the time the first payments would have to be made                                                             
   for  taxpayers  to   get  their  technical   systems  in  order.                                                             
   Transition provisions were created  on page 1, lines  1 - 14 [of                                                             
   Technical Amendment 2], that  adjusted for the three-quarters  of                                                            
   a year. The administration's  bill had six  months. Page 1,  line                                                            
   15 - page  2, line  9 [of Technical  Amendment 2],  said for  the                                                            
first 180 days taxpayers can pay  what they would have owed under                                                               
existing statutes. In  the seventh month they would  have to true                                                               
everything up.  Finally, language on  page 2,  lines 11 -  17 [of                                                               
Technical Amendment 2], granted  the department authority to make                                                               
regulations  to  enforce  these  provisions  retroactive  to  the                                                               
effective date of the bill, which was April 1.                                                                                  
                                                                                                                                
CHAIR  WAGONER asked  if this  gave the  companies and  the state                                                               
enough time to set up their accounting procedures.                                                                              
                                                                                                                                
MR. DICKINSON  replied that it  compressed the timeframe,  but it                                                               
was adequate.                                                                                                                   
                                                                                                                                
4:22:46 PM                                                                                                                    
SENATOR BEN  STEVENS asked  if the first  six months  carried any                                                               
penalty.                                                                                                                        
                                                                                                                                
MR.  DICKINSON  replied if  taxpayers  underpaid  what they  owed                                                               
under the current  rules, they could have a  penalty or interest;                                                               
but as long as they paid  what was owed under current rules, they                                                               
wouldn't have a penalty.                                                                                                        
                                                                                                                                
SENATOR  SEEKINS  moved  to  adopt   Technical  Amendment  2  and                                                               
objected. He  said that in his  own code of ethics  a retroactive                                                               
tax is  not fair. He  would have a hard  time voting for  any tax                                                               
that precedes the effective date of a bill.                                                                                     
                                                                                                                                
4:23:54 PM                                                                                                                    
SENATOR STEDMAN said  at first this tax was going  to be in place                                                               
as early  as January 1 and  now they were considering  the end of                                                               
the third quarter. He thought that would work out fairly well.                                                                  
                                                                                                                                
SENATOR SEEKINS removed his objection,  but he said he might have                                                               
a  further amendment  if this  one  was adopted.  He renewed  his                                                               
objection for Senator Ben Stevens' comment.                                                                                     
                                                                                                                                
SENATOR  BEN  STEVENS  said  he  felt the  same  way  as  Senator                                                               
Seekins. He removed his objection.                                                                                              
                                                                                                                                
SENATOR SEEKINS removed his objection.                                                                                          
                                                                                                                                
CHAIR   WAGONER  announced   that   without  further   objection,                                                               
Technical Amendment 2 was adopted.                                                                                              
                                                                                                                                
4:25:34 PM                                                                                                                    
CHAIR WAGONER announced  Administrative Amendment 1 to  be up for                                                               
consideration as follows:                                                                                                       
                                                                                                                                
                      ADMINISTRATIVE AMENDMENT 1                                                                            
                                                                                                                                
   OFFERED IN THE SENATE BY SENATOR WAGONER                                                                                     
   TO: CSSB 305(RES), draft version 24-GS2052\Y                                                                                 
                                                                                                                                
   Page 18, line 4: insert after "than zero":                                                                                   
                                                                                                                                
        If a  producer  does not  produce  taxable oil  or  gas                                                                 
        during a  month, the  producer  is considered  to  have                                                                 
        generated  a  positive  production  tax  value  if  the                                                                 
        calculation  described   in  this   subsection   yields                                                                 
        appositive  number  because  the  producer's   adjusted                                                                 
        lease expenditures for a month are less than zero as  a                                                                 
        result of the producer's receiving a payment or  credit                                                                 
        under (e) of this section or otherwise.                                                                                 
                                                                                                                                
   Page 18, line 23: insert new paragraph (3):                                                                                  
                                                                                                                                
        (3) an explorer that  has taken a  tax credit under  AS                                                                 
        43.55.024(b) or that  has obtained  a transferable  tax                                                                 
        credit  certificate  under  AS  43.55.024(d)  for   the                                                                 
        amount  of  a  tax  credit  under  AS  43.55.024(b)  is                                                                 
        considered a producer, subject to the tax levied  under                                                                 
        AS  43.55.011(e),  to  the  extent  that  the  explorer                                                                 
        generates  a  positive  production  tax  value  as  the                                                                 
        result of the explorer's receiving a payment or  credit                                                                 
        described in (e) of this section.                                                                                       
                                                                                                                                
   Page 19, line 29: replace (A) "outlays for capital assets" with:                                                             
                                                                                                                                
        (A) an expenditure, when  incurred, to acquire an  item                                                                 
        if the  acquisition cost  is otherwise  a direct  cost,                                                                 
        notwithstanding that  the expenditure  may be  required                                                                 
        to be  capitalized rather  than treated  as an  expense                                                                 
        for  financial   accounting  or   federal  income   tax                                                                 
        purposes;                                                                                                               
                                                                                                                                
   Page 21, line 9: replace "amounts that have not been paid" with:                                                             
                                                                                                                                
        amounts incurred                                                                                                        
                                                                                                                                
   Page 21, lines 14 - 15: after "business entity" delete all                                                                   
   material and insert:                                                                                                         
                                                                                                                                
        , whether  or  not the  transaction  is treated  as  an                                                                 
        asset sale for federal income tax purposes.                                                                             
                                                                                                                                
Page 21, lines 16 - 17: replace "any payment of credit the                                                                      
producer receives for" with:                                                                                                    
                                                                                                                                
     Certain payments  or credits received by  the producer,                                                                    
     as provided in this subsection.  If one or more payment                                                                    
     or credits  subject to this subsection  are received by                                                                    
     a  producer  during  a  month or,  under  (f)  of  this                                                                    
     section,  during a  calendar  year, and  if either  the                                                                    
     total  amount of  the payments  or credits  exceeds the                                                                    
     amount  of the  producer's  lease  expenditures or  the                                                                    
     producer has no lease  expenditures, the producer shall                                                                    
     nevertheless  subtract those  payments or  credits from                                                                    
     the lease expenditures or  from zero, respectively, and                                                                    
     the  producer's adjusted  lease  expenditures for  that                                                                    
     moth or calendar  year are a negative  number and shall                                                                    
     be  applied  to  the  calculation  under  (a)  of  this                                                                    
     section as a negative  number. They payments or credits                                                                    
     that  a  producer  must subtract  from  the  producer's                                                                    
     lease   expenditures,   or   from  zero,   under   this                                                                    
     subsection  are payments  or  credits  received by  the                                                                    
     producer for                                                                                                               
                                                                                                                                
Page 21, lines 18 - 22: delete all material, insert:                                                                            
                                                                                                                                
     (1)the use  by another person of  a production facility                                                                    
     in which the producer has  an ownership interest or the                                                                    
     management  by the  producer of  a production  facility                                                                    
     under   a  management   agreement  providing   for  the                                                                    
     producer to receive a management fee;                                                                                      
                                                                                                                                
Page 22, line 1: replace (n) with (m) and after "2006;" insert:                                                                 
                                                                                                                                
     For purposes of this  subsection, if a producer removes                                                                    
     from the  state, for  use outside  the state,  an asset                                                                    
     described in this subparagraph,  the value of the asset                                                                    
     at  the time  it  is removed  is  considered a  payment                                                                    
     received  by  the  producer for  the  transfer  of  the                                                                    
     asset;                                                                                                                     
                                                                                                                                
Page 23, line 28: insert "(b)," at the beginning of the line                                                                    
                                                                                                                                
Page 23, lines 29 - 30: replace (d)(2)(L) with (d)(2)(N) and                                                                    
delete "or (d)(2)(M)"                                                                                                           
                                                                                                                                
Page 23, line 31: delete "(d)(2)(L) or (d)(2)(M)" and insert                                                                    
(e)(3)(A)                                                                                                                       
                                                                                                                                
 Page 24, line 10: delete "(d)(2)(L) and replace with (d)(2)(N)                                                                 
                                                                                                                                
   Page 24, line 4: insert after "Revenue Code":                                                                                
                                                                                                                                
        as amended                                                                                                              
                                                                                                                                
   Page 24,  lines 12  - 13:  delete all  material after  "due"  and                                                            
   insert:                                                                                                                      
                                                                                                                                
        If a  producer fails  to comply  with a  request  under                                                                 
        this  paragraph,   there   shall  be   added   to   any                                                                 
        underpayment determined  by the  department under  this                                                                 
        section a penalty in  the amount of  20 percent of  the                                                                 
        underpayment.                                                                                                           
                                                                                                                                
   Page 24, lines 14 - 27: delete all material and reorder                                                                      
                                                                                                                                
   Page 24, lines 28 - 30: delete all material and insert:                                                                      
                                                                                                                                
        (n) For  purposes  of  determining the  amount  of  the                                                                 
        adjustment by  subtraction  that  must  be  made  to  a                                                                 
        producer's  lease  expenditures  as  a  result  of  the                                                                 
        producer's  receiving   a  payment   or  credit   under                                                                 
        (e)(3)(A) of this section,                                                                                              
                                                                                                                                
   Page 25, lines 7 - 11: delete all material and reorder                                                                       
                                                                                                                                
   CHAIR  WAGONER  explained  that  Ms.  Wilson  had  questions  in                                                             
   previous meetings about  the taxes  in this bill  and Mr.  Balash                                                            
 had been working with the administration on the disagreements.                                                                 
                                                                                                                                
   JOE BALASH, staff to the Legislative Budget and Audit  Committee,                                                            
   said that tax counsel, Mr.  Kirchner of Greenberg & Traurig  LLC,                                                            
   had recommendations for Section  26 that dealt  with a number  of                                                            
   tax  base  adjustments,  determinations  of  value,  credits  and                                                            
   payments. The department now has  a better understanding of  what                                                            
   he was attempting to accomplish in crafting the language and  was                                                            
   able to  resolve a  number of  the issues  that would  allow  the                                                            
   legislation to  flow  more  efficiently.  He  said  a  number  of                                                            
   references were mixed up in  the drafting process and those  were                                                            
   easy to  correct.  The department  helped  craft a  provision  on                                                            
   management fees, asset  churning and removal  of assets from  the                                                            
   state. It also agreed  to include the  acquisition of a  business                                                            
   entity in the list of (d)(2) items, which do not count as  direct                                                            
   costs. He said the department would have drafted this  amendment,                                                            
   but Robert  Mintz, Assistant  Attorney General,  needed to  focus                                                            
his attention on the additional  provisions. The technical pieces                                                               
of the  amendment work and  a note  from Mr. Mintz  indicates his                                                               
agreement.                                                                                                                      
                                                                                                                                
CHAIR  WAGONER  asked   him  to  distribute  that   note  to  the                                                               
committee.                                                                                                                      
                                                                                                                                
MR. BALASH noted that one  item was left unresolved in subsection                                                               
(l),  on  page  23,  line  29, through  page  24,  line  13.  The                                                               
department was not certain it  needed the additional audit powers                                                               
granted by this  subsection. It seemed to be  a substantive issue                                                               
that was beyond its charge to resolve.                                                                                          
                                                                                                                                
4:31:12 PM                                                                                                                    
SENATOR STEDMAN asked him to  explain the second paragraph on the                                                               
first  page of  Administrative Amendment  1 that  began with  "Is                                                               
considered a producer".                                                                                                         
                                                                                                                                
MR. BALASH explained that was requested by the department.                                                                      
                                                                                                                                
CHAIR WAGONER  announced an at ease  from 4:32:03 PM   to 4:32:04                                                           
PM to get further help from the Attorney General's office.                                                                    
                                                                                                                                
ROBERT MINTZ, Assistant Attorney  General, explained that several                                                               
of the amendments  were intended to deal with  a timing mismatch.                                                               
One  of the  provisions in  the bill  said the  main tax  credits                                                               
could be  used by  companies that are  doing exploration  even if                                                               
they don't  have any production  and, therefore, wouldn't  have a                                                               
production tax to deduct them against. He explained:                                                                            
                                                                                                                                
     One of  the things you  can get  a credit for  is lease                                                                    
     expenditures should  be actual net  lease expenditures.                                                                    
     Subsection  (e) of  new section  160 of  the production                                                                    
     tax statute provides that when  a producer gets certain                                                                    
     types   of   reimbursements   for  assets   that   were                                                                    
     previously  acquired, those  reimbursements have  to be                                                                    
     netted against  the expenditures  so that you  only get                                                                    
     to deduct net expenditures.                                                                                                
                                                                                                                                
He said the  problem was that deductible  expenditures might have                                                               
been  made in  one period  that didn't  also have  production and                                                               
those  might not  be able  to be  recaptured in  a later  period.                                                               
These several  provisions say even if  you don't have any  oil or                                                               
gas  production  in  this  period,   if  you  get  one  of  these                                                               
reimbursements  or  similar  payments during  that  period,  that                                                               
reimbursement or  payment has to  be treated as a  negative lease                                                               
expenditure, which leads  to a positive production  tax. So, they                                                               
   came up with language stating, "For purposes of this kind of                                                                 
   recapture provision, the explorer will be considered a producer                                                              
   and he will be subject to production tax."                                                                                   
                                                                                                                                
   4:36:07 PM                                                                                                                 
   SENATOR BEN STEVENS said  he was lost at  the end of Mr.  Mintz's                                                            
   explanation. He  asked  if  an explorer  has  no  production  tax                                                            
   liability, what's  the  purpose  of creating  that  entity  as  a                                                            
   production taxpayer.                                                                                                         
                                                                                                                                
   MR. MINTZ went through the following example:                                                                                
                                                                                                                                
        If  an   explorer  in   2007  spends   $1  million   on                                                                 
        exploration and he  is allowed to  treat that as  lease                                                                 
        expenditures. Since there is no oil and gas production                                                                  
        to generate positive  value, he basically  gets a  loss                                                                 
        of $1 million. He could  convert that into a credit  at                                                                 
        25 percent under the  CS and sell  it for $250,000.  If                                                                 
        during that year the explorer  had sold the asset  that                                                                 
        he acquired  for $1  million,  for $500,000,  he  could                                                                 
        only take a credit for the net outlay of $500,000.  But                                                                 
        suppose the sale  doesn't take place  until 2008.  It's                                                                 
        no  longer  a  $1  million  expense  to  net  the  half                                                                 
        million-dollar  revenue  against.  So,  basically,  the                                                                 
        explorer would have  received the benefit  of the  full                                                                 
        $1 million expense without  having to net that  revenue                                                                 
        against it.  This  says  in  that  second  year,  2008,                                                                 
        you're going to have  to treat the half-million  dollar                                                                 
        revenue as a  negative lease  expenditure, which  would                                                                 
        create  a   tax   liability.  And   that's   why   this                                                                 
        provision...the  explorer   could  be   treated  as   a                                                                 
        producer subject to the  net production tax.  Otherwise                                                                 
        we wouldn't be  able to follow  through with the  basic                                                                 
        principal that only  net expenses  would be  deductible                                                                 
        and eligible for credit.                                                                                                
                                                                                                                                
   SENATOR BEN STEVENS thanked him for the explanation.                                                                         
                                                                                                                                
   4:39:01 PM                                                                                                                 
   SENATOR STEDMAN asked him to explain the first paragraph on page                                                             
   2 that read:                                                                                                                 
                                                                                                                                
        Page 19, line 29: replace (A) "outlays for capital assets"                                                              
        with:                                                                                                                   
                                                                                                                                
             (A) an expenditure, when incurred, to acquire an                                                                   
             item if the acquisition cost is otherwise a                                                                        
          direct cost, notwithstanding  that the expenditure                                                                    
          may  be required  to  be  capitalized rather  than                                                                    
          treated as an expense  for financial accounting or                                                                    
          federal income tax purposes;                                                                                          
                                                                                                                                
He  wanted  to  make  sure   the  credits  applied  to  what  the                                                               
legislature intended them to.                                                                                                   
                                                                                                                                
MR. MINTZ answered that the reason  the original the bill had the                                                               
term  "outlays  for  capital  assets"  was  to  make  clear  that                                                               
expenditures for  capital assets  were being  treated differently                                                               
under  the  new  production  tax.   Generally,  there  is  a  the                                                               
distinction   between  operating   expenses,   which  are   fully                                                               
deductible during  the time  period that  they are  incurred, and                                                               
capital expenditures on  the other hand, which  because they last                                                               
a  long  time, generally  have  to  depreciated over  time.  This                                                               
language  says they  are not  following the  general rule  in the                                                               
bill, but  instead the full  amount of money  that is spent  on a                                                               
capital  expenditure is  deductible  in the  time  period it  was                                                               
made.                                                                                                                           
                                                                                                                                
He said  that tax consultants  for the committee  raised concerns                                                               
that the  term "capital assets"  could be interpreted  to include                                                               
the purchase  of a company  or stock. The proposed  language more                                                               
directly  accomplishes what  they are  trying to  do which  is to                                                               
say,  if you  spend  money  to acquire  something,  it should  be                                                               
treated  as a  direct cost  - even  if the  normal capitalization                                                               
rules under IRS or financial  accounting rules would require that                                                               
to  be  spread  over  time.  In this  case  you  can  deduct  the                                                               
expenditure when it's incurred so  the interpretation of "capital                                                               
assets" isn't an issue.                                                                                                         
                                                                                                                                
4:42:25 PM                                                                                                                    
SENATOR SEEKINS asked if that  same expenditure was treated as an                                                               
expense in  financial accounting or  as a deductible for  IRS tax                                                               
purposes, would that item be deductible on state income tax.                                                                    
                                                                                                                                
MR. MINTZ  replied that the  intent was  to not affect  how items                                                               
are handled for federal income tax purposes.                                                                                    
                                                                                                                                
SENATOR  SEEKINS  said  it wasn't  the  legislature's  intent  to                                                               
create double-deductibles and he  was wondering if this provision                                                               
might do that.                                                                                                                  
                                                                                                                                
MR.  MINTZ  responded  that  it was  his  understanding  that  an                                                               
expenditure that  would be treated  as a capital  expenditure for                                                               
income tax  purposes would continue  to be treated that  way. All                                                               
   this is saying is that for  production tax purposes, it would  be                                                            
   deducted in the same way as an operating expense.                                                                            
                                                                                                                                
   MR. DICKINSON  agreed with  Mr. Mintz  and added  that they  were                                                            
   building on  existing  rules that  apply  to income  tax  so  the                                                            
   department has  less work  to do  and gets  fewer arguments  from                                                            
   taxpayers.                                                                                                                   
                                                                                                                                
   4:44:42 PM                                                                                                                 
   SENATOR  STEDMAN  asked  when  a  producer  purchases  an  office                                                            
   building in Anchorage, could it get a credit to take against the                                                             
   PPT.                                                                                                                         
                                                                                                                                
   MR. DICKINSON  replied  generally  no. He  envisioned  a  set  of                                                            
   direct costs  that would  be the  kinds of  things that  partners                                                            
   agree to  pay for  when they  have joint  operating agreements  -                                                            
   like in Prudhoe  Bay where  there are many  owners. Typically  an                                                            
   office building in  Fairbanks would not  qualify. But, you  might                                                            
   see an overhead  rate built  in, which recognizes  the fact  that                                                            
   when you have employees working on  the North Slope, you have  to                                                            
   house them  someplace rather  than  fly them  back and  forth  to                                                            
   work.                                                                                                                        
                                                                                                                                
   4:46:10 PM                                                                                                                 
   SENATOR STEDMAN asked if  a bunkhouse were  built in Prudhoe  Bay                                                            
   versus a  bunkhouse in  Fairbanks, would  either one  of them  be                                                            
   available for the PPT credit.                                                                                                
                                                                                                                                
   MR. DICKINSON replied  if a  producer were to  build a  bunkhouse                                                            
   and people who  were working on  that field rotated  in and  out,                                                            
   that could qualify as a direct cost.                                                                                         
                                                                                                                                
   4:47:17 PM                                                                                                                 
   SENATOR STEDMAN  asked if  that could  be interpreted  to mean  a                                                            
   bunkhouse in Dallas.                                                                                                         
                                                                                                                                
   MR. DICKINSON replied no.                                                                                                    
                                                                                                                                
   4:48:29 PM                                                                                                                 
   SENATOR BEN STEVENS went to page 23, lines 29 - 31, of Version  Y                                                            
   and asked which  item was  being deleted. He  was confused  about                                                            
   whether it was substantive or administrative.                                                                                
                                                                                                                                
   MR. BALASH  replied by  reading the  text: "for  the purposes  of                                                            
   making a determination  of direct cost"  referenced direct costs                                                             
   listed [on  page 21,  line 8  of Version  Y] in  "(d)(2)(N) in  a                                                            
   transaction that is not at arm's length transaction,".                                                                       
                                                                                                                                
He  explained that  "amounts incurred"  would be  inserted before                                                               
"to the extent those amounts  exceed fair market value;" [on page                                                               
21, lines 9  - 10 of Version  Y]. Those are not  direct costs. He                                                               
said that the reference to (d)(2)(M) was deleted on page 23.                                                                    
                                                                                                                                
BEN STEVENS asked why it was deleted.                                                                                           
                                                                                                                                
MR. BALASH replied that it was a drafting error.                                                                                
                                                                                                                                
4:56:53 PM                                                                                                                    
MR. MINTZ added that all the  references make sense, but they are                                                               
confusing. Sometimes they are redundant.                                                                                        
                                                                                                                                
4:58:07 PM                                                                                                                    
SENATOR DYSON arrived a few minutes earlier.                                                                                    
                                                                                                                                
4:58:59 PM                                                                                                                    
SENATOR BEN STEVENS asked the purpose of the repetition.                                                                        
                                                                                                                                
MR.  BALASH  explained  that  (L) sets  out  how  the  department                                                               
establishes  whether or  not the  transaction  occurred at  arm's                                                               
length; (N) establishes  what sorts of occurrences  they look for                                                               
to determine  (e)(3)(A), which is  an adjustment to  direct costs                                                               
as lease expenditures.                                                                                                          
                                                                                                                                
SENATOR SEEKINS  remarked that  it appears to  not be  a circular                                                               
non sequitur.                                                                                                                   
                                                                                                                                
5:00:57 PM                                                                                                                    
SENATOR  STEDMAN   asked  for  an   explanation  of  page   4  of                                                               
Administrative Amendment  1 that referenced  page 24, lines  12 -                                                               
13,  of  Version  Y  that   inserted  a  20-percent  penalty  for                                                               
underpayment of a tax.                                                                                                          
                                                                                                                                
MR. BALASH  replied that the 20-percent  penalty for underpayment                                                               
was determined  by the  department in its  audit process.  The 20                                                               
percent came from  26 USC 6662(e), that portion of  tax code that                                                               
sets out penalties  that are a result of Section  482 audits.  He                                                               
noted that 6662 states that  an egregious underpayment is subject                                                               
to a 40-percent penalty.                                                                                                        
                                                                                                                                
5:03:31 PM                                                                                                                    
SENATOR SEEKINS asked  if this penalty applied  if the department                                                               
requested documentation that didn't exist  at the time the entity                                                               
took the deduction.                                                                                                             
                                                                                                                                
   ROBYNN WILSON,  Director,  Tax Division,  Department  of  Revenue                                                            
   (DOR), replied yes.                                                                                                          
                                                                                                                                
   SENATOR SEEKINS  remarked,  "So,  it's  almost  tantamount  to  a                                                            
   penalty for committing fraud - or just not producing."                                                                       
                                                                                                                                
   MS. WILSON  responded that  she  didn't have  an opinion  on  his                                                            
   comparison to fraud. It hones in on the fact that the production                                                             
   taxpayer  needs   to  have   contemporaneous  documentation   for                                                            
   transfer pricing issues. This  would address the situation  where                                                            
   either affiliated companies or  non-affiliated companies make an                                                             
   arrangement to  sell  something  for  a  non  market  price.  She                                                            
   hesitated to  use the  word  fraud, but  it's not  typically  the                                                            
   result of a mistake.                                                                                                         
                                                                                                                                
   5:05:48 PM                                                                                                                 
   SENATOR BEN  STEVENS  asked  what current  methodologies  are  in                                                            
   place to  audit  these  transactions and  what  is  the  existing                                                            
   recourse for violations of them.                                                                                             
                                                                                                                                
   MS. WILSON replied  that generally,  the state  doesn't get  into                                                            
   transfer  pricing   issues,  particularly   with  oil   and  gas                                                             
   companies. The IRS may have  a transfer issue between a  domestic                                                            
   company and  a  foreign affiliate,  but  the state  doesn't  have                                                            
   those issues.                                                                                                                
                                                                                                                                
   MR. DICKINSON said the  department now has  a standard of  actual                                                            
   costs, which  is  sufficient  to look  to  for  transfer  pricing                                                            
   transactions.  A  5-percent  civil  penalty  already  exists  for                                                            
   negligent or intentional disregard of the law.                                                                               
                                                                                                                                
 SENATOR BEN STEVENS asked if that applied to transfer pricing.                                                                 
                                                                                                                                
   MR. DICKINSON replied that the existing civil penalties apply  to                                                            
   any statement on the tax return.                                                                                             
                                                                                                                                
   SENATOR BEN  STEVENS  asked  if  the  statement  could  be  about                                                            
   income, property or a production severance tax filing.                                                                       
                                                                                                                                
   MR. DICKINSON  replied  that  the 5-percent  penalty  applies  to                                                            
   anything the department administers.                                                                                         
                                                                                                                                
   SENATOR BEN STEVENS questioned the  fact that the department  has                                                            
   existing  civil  penalties   for  any  filer   on  any  sort   of                                                            
   transaction and asked why it would  all of a sudden treat one  as                                                            
   5 percent and another as 20 percent.                                                                                         
                                                                                                                                
MR. DICKINSON responded that fraud  has a 50-percent penalty, but                                                               
it  has a  much higher  standard than  negligence or  intentional                                                               
disregard.                                                                                                                      
                                                                                                                                
5:09:56 PM                                                                                                                    
SENATOR SEEKINS asked why the  amendment deletes the section that                                                               
allows   someone  to   prepare  evidence   of  an   arm's  length                                                               
transaction after the fact.                                                                                                     
                                                                                                                                
MR. DICKINSON replied that he  should direct that question to the                                                               
maker of  the amendment,  because the  department had  no problem                                                               
with it  and was just trying  to make it fit.  It normally looked                                                               
at costs between  the point of production and the  point of sale,                                                               
but now  it would  look at  upstream costs and  there may  be new                                                               
issues  there.  Legislative  consultants thought  the  additional                                                               
powers would be appropriate; but  the administration did not seek                                                               
them.                                                                                                                           
                                                                                                                                
5:11:37 PM                                                                                                                    
SENATOR BEN  STEVENS asked if  the reason  he was looking  at the                                                               
upstream costs  was because the  profit sharing tax  goes towards                                                               
the  entire corporate  income versus  the cost  of producing  one                                                               
barrel of oil.                                                                                                                  
                                                                                                                                
MR. DICKINSON replied yes.                                                                                                      
                                                                                                                                
SENATOR BEN  STEVENS asked  if the  state is  now looking  at the                                                               
corporate  profit of  an entity  that operates  in the  petroleum                                                               
business the  same way  it looks  at the  corporate profit  of an                                                               
entity that operates  in the fish business or  any other business                                                               
and the  5 percent penalty  for intentional misfiling and  the 50                                                               
percent penalty for fraud are already on the books.                                                                             
                                                                                                                                
MR.  DICKINSON  replied this  is  not  an  income tax  and  other                                                               
industries would typically be paying  an income tax. A production                                                               
tax  is   different  than  income   tax,  but  some   income  tax                                                               
applications can  be appropriately applied to  transfer costs. He                                                               
said the department's audits are  brutal and one issue that arose                                                               
was  if documentation  was contemporaneous  or created  after the                                                               
fact. And this is what they determined.                                                                                         
                                                                                                                                
SENATOR SEEKINS remarked that this is  a new area of taxing power                                                               
for   the   department   and   the   penalty   for   not   having                                                               
contemporaneous  evidence was  eliminated  in  the amendment.  It                                                               
just says  to produce it; it  doesn't have to be  in existence at                                                               
the time of the deduction.                                                                                                      
                                                                                                                                
   5:15:22 PM                                                                                                                 
   SENATOR BEN  STEVENS  recapped  that the  current  system  audits                                                            
   transactions that occur on the downstream side and asked if  they                                                            
   would now be  looking at  transfers of cost  among affiliates  on                                                            
   the upstream side.  He asked  if that meant  that the  downstream                                                            
   portions would  also  see  a 20-percent  penalty  rather  than  5                                                            
   percent.                                                                                                                     
                                                                                                                                
   MR.  DICKINSON  replied  this  penalty  was  very  specific  and                                                             
   addressed not providing  information for a  482 audit that  would                                                            
   only apply to the upstream  portions. The 20-percent penalty  was                                                            
   not replacing  any other  penalty or  taking the  standards  that                                                            
   apply to  5 percent  and applying  them on  a 20  percent  scale.                                                            
   "It's simply this one pinpointed item."                                                                                      
                                                                                                                                
   5:16:55 PM                                                                                                                 
   SENATOR BEN STEVENS  asked if  there would still  be a  5-percent                                                            
 penalty for using fraudulent information in corporate statute.                                                                 
                                                                                                                                
   MR. DICKINSON responded:                                                                                                     
                                                                                                                                
        I believe that if the  penalties that are being sought                                                                  
        in this  amendment  were  applied,  we  would probably                                                                  
        argue that  there was  also intentional  disregard  and                                                                 
        ask for the 5 percent penalty on top of that.                                                                           
                                                                                                                                
   5:18:10 PM                                                                                                                 
   SENATOR BEN STEVENS remarked  that it seemed to  him that it was                                                             
   now double jeopardy  and he wondered  what the justification  was                                                            
   for this section.                                                                                                            
                                                                                                                                
   5:19:24 PM                                                                                                                 
   SENATOR ELTON said this language  was saying the department  will                                                            
   make a determination and can  ask for additional information.  If                                                            
   the entity  refused to  provide  any information,  an  additional                                                            
   penalty could be levied. It didn't seem unusual to him.                                                                      
                                                                                                                                
   MS.  WILSON   added   that   she  thought   that   was   a   fair                                                            
   representation.                                                                                                              
                                                                                                                                
   SENATOR SEEKINS agreed with Senator Elton that it applied to  the                                                            
   guy who refuses  to substantiate their  arm's length transaction                                                             
   with contemporaneous data.                                                                                                   
                                                                                                                                
   SENATOR STEDMAN said  he thought these  were substantive changes                                                             
   rather than administrative.                                                                                                  
                                                                                                                                
5:21:50 PM                                                                                                                    
SENATOR STEDMAN asked why language on lines  7 - 11 on page 25 of                                                               
Version Y was being deleted.                                                                                                    
                                                                                                                                
MS. WILSON replied that the issue  was the fact that the language                                                               
in those lines does not have a  time limit. So, an asset could be                                                               
80 years  old, it could be  taken out of  the state and all  of a                                                               
sudden  it  would require  recapture  of  any benefit  a  company                                                               
received from it - even though  it was well past its useful life.                                                               
The  question   was  cured  through  page   3  of  Administrative                                                               
Amendment 1  regarding page 22, line  1 of Version Y  that limits                                                               
the recapture to the value that  was received. If something is 80                                                               
years old and the salvage value  is all that was received, that's                                                               
all that is applicable.                                                                                                         
                                                                                                                                
5:23:44 PM                                                                                                                    
MR.  DICKINSON added  that nothing  is  received if  an asset  is                                                               
taken out of the state. He explained:                                                                                           
                                                                                                                                
     Our objection  was to using  cost, because if  you used                                                                    
     it   here   for   10  years,   probably   costs   isn't                                                                    
     appropriate. So, what we're saying  is that you look at                                                                    
     the value of  it when you remove it from  the state and                                                                    
     treat  that as  though for  transaction purposes  of an                                                                    
     Alaska production.                                                                                                         
                                                                                                                                
5:24:23 PM                                                                                                                    
MS. WILSON  added that the last  line of that amendment  says the                                                               
value of  the asset  at the  time it is  removed is  considered a                                                               
payment received.                                                                                                               
                                                                                                                                
5:25:17 PM                                                                                                                    
SENATOR STEDMAN asked why book value wouldn't be used.                                                                          
                                                                                                                                
MR. DICKINSON  answered that would  be another way of  looking at                                                               
it,  but this  language  met the  administration's objection.  He                                                               
suggested asking that question of the maker of the amendment.                                                                   
                                                                                                                                
SENATOR SEEKINS asked what he meant by book value.                                                                              
                                                                                                                                
MR. DICKINSON  added that there  were a  lot of values  to choose                                                               
from.  Using book  value would  require financial  accounting and                                                               
all that entails.                                                                                                               
                                                                                                                                
     What  satisfied us  is the  value  here recognized  the                                                                    
     fact that  if such a  thing occurs, the  department and                                                                    
     the  taxpayer may  disagree, but  at  least you're  all                                                                    
        trying to get to the same thing - the value of the                                                                      
        asset.                                                                                                                  
                                                                                                                                
   5:26:21 PM                                                                                                                 
   SENATOR SEEKINS  asked who  assigned a  value when  an asset  was                                                            
   removed.                                                                                                                     
                                                                                                                                
   MR. DICKINSON replied if it were  sold, it would show up  through                                                            
   accounting. This applies when an asset isn't sold.                                                                           
                                                                                                                                
   SENATOR SEEKINS  asked if  the state  would recapture  the value                                                             
   under both the PPT and income tax when it was resold.                                                                        
                                                                                                                                
   MR. DICKINSON replied that was correct. "Both transactions would                                                             
   show up, but removal from the  state would not trigger an  income                                                            
   tax obligation, but it would trigger a PPT obligation."                                                                      
                                                                                                                                
   5:28:45 PM                                                                                                                 
   SENATOR BEN STEVENS said he  wanted Legislative Legal to  explain                                                            
   why an extra  layer of penalty  was needed in  civil, as well  as                                                            
   criminal, statutes that  have to do  with transfer costs,  fraud,                                                            
   and withholding of documents. He wasn't convinced this provision                                                             
   was needed.                                                                                                                  
                                                                                                                                
   5:30:05 PM                                                                                                                 
   SENATOR STEDMAN said he didn't  think getting the answer to  that                                                            
   question would slow the committee's deliberations on this issue.                                                             
                                                                                                                                
   5:30:36 PM                                                                                                                 
   SENATOR  ELTON   made  a   friendly   suggestion  to   have   the                                                            
   administration explain  the  provisions  it wanted  and  to  have                                                            
   Legislative Legal look at the penalty component.                                                                             
                                                                                                                                
   5:32:03 PM                                                                                                                 
   SENATOR SEEKINS stated that he wanted to see a percentage  number                                                            
   as a penalty.                                                                                                                
                                                                                                                                
   5:32:31 PM                                                                                                                 
   MARY JACKSON said that  Legislative Legal's involvement has  been                                                            
   minimal  and  she  would  get  a  better  explanation  from   the                                                            
   administration on its insertions. She  added that she called the                                                             
   amendment administrative not because  it wasn't substantive, but                                                             
   because  these   issues   were  raised   predominantly   by   the                                                            
   administration.                                                                                                              
                                                                                                                                
   CHAIR WAGONER  recessed the  Senate Resources  Committee  meeting                                                            
   until 10:00 a.m. tomorrow, March 23.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects