Legislature(2005 - 2006)
03/22/2006 03:40 PM Senate RES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Dan Dickinson, Consultant to the Governor | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 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.
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