Legislature(2017 - 2018)SENATE FINANCE 532
01/19/2018 09:00 AM Senate RESOURCES
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| HB111OVERVIEW:REGULATIONSPACKAGEFORHOUSEBILL111(CHAPTER3SSLA17) | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
SENATE FINANCE COMMITTEE
January 19, 2018
9:01 a.m.
MEMBERS PRESENT
SENATE FINANCE
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Donny Olson
Senator Gary Stevens
Senator Natasha von Imhof
SENATE RESOURCES
Senator Cathy Giessel, Chair
Senator John Coghill, Vice-Chair
Senator Natasha von Imhof
Senator Kevin Meyer
Senator Bill Wielechowski
Senator Click Bishop
MEMBERS ABSENT
SENATE FINANCE
Senator Peter Micciche
SENATE RESOURCES
Senator Bert Stedman
OTHER LEGISALTORS PRESENT
Representative Dave Talerico
Representative Andy Josephson
COMMITTEE CALENDAR
OVERVIEW: REGULATIONS PACKAGE FOR HOUSE BILL 111 (CHAPTER 3
SSLA 17)
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
Ken Alper, Director
Tax Division
Department of Revenue
POSITION STATEMENT: Provided overview of regulations
package for HB 111.
John Larsen, Audit Master
Tax Division
Department of Revenue
POSITION STATEMENT: Participated in overview of regulations
package for HB 111.
Mary Hunter Gramling, Assistant Attorney General
Department of Law
POSITION STATEMENT: Participated in overview of regulations
package for HB 111.
ACTION NARRATIVE
9:01:50 AM
CHAIR GIESSEL called the Joint Senate Resources and Finance
Committee meeting to order at 9:01 a.m. Resources Committee
members present at the call to order were Senators Bishop,
Meyer, von Imhof, Wielechowski, Coghill, and Chair Giessel.
Senator Stedman was excused.
CO-CHAIR MACKINNON, Senate Finance Committee, introduced
the Senate Finance Committee members present at the call to
order: Senators Olson, von Imhof, Stevens, Bishop, Co-chair
Hoffman and Co-chair MacKinnon. Senator Micciche was
excused.
CHAIR GIESSEL also welcomed Representatives Talerico and
Josephson, who serve with her on the HB 111 Working Group.
^#HB111 OVERVIEW: REGULATIONS PACKAGE FOR HOUSE BILL 111
(CHAPTER 3 SSLA 17)
OVERVIEW: REGULATIONS PACKAGE FOR HOUSE BILL 111
(CHAPTER 3 SSLA 17)
9:03:09 AM
CHAIR GIESSEL recounted that the legislature had passed HB
111 months previously, which affected tax credits. Those
laws are passed on to departments where bureaucrats (def:
ruling from the desk) write rules, which have the force of
law. She wanted to ensure that the rules match the laws
that were passed and intended by the legislature.
Legislators spend a lot of time deliberating; hear facts
from experts, debate issues, and wrestle those facts to the
ground and write laws. She reiterated that she wants to
make sure those rules that are written to enforce those
laws are accurate.
Today they would examine one regulation package that is
almost complete. A second package, which members have a
copy of, is out for public comment now and she understands
that a third package of rules will be coming out later. She
welcomed the "chief maker of rules," Department of Revenue,
(DOR) Tax Director, Ken Alper, and his Audit Master, John
Larsen, to the table.
9:05:32 AM
KEN ALPER, Director, Tax Division, Department of Revenue
(DOR), clarified that the HB 111 legislation has two
packages of regulations. One of them is complete and has
been signed and now has the force of law. The second
package is in its process now, which means he can't talk
about some of the details.
He introduced John Larsen, who is not new to the state but
might be new to committee members. He is an Audit Master,
one of the subject matter experts and one of the production
tax specialist positions that was created when Alaska
switched to the net profits-based tax. Mr. Larsen had been
with the department for 10 years and had the primary role
of leading the regulations drafting process for the last
several oil and gas tax bills that have passed the
legislature.
9:07:24 AM
MR. ALPER said the Department of Law (DOL) asked him to
read a brief disclaimer about the current process, and
turned to slide 2, "Statement on Process:"
"We have been asked to present on recent regulations
from a process standpoint. Importantly, DOR has one
set of regulations that are currently noticed for
public comment. This legislative hearing is not part
of the public comment process for the adoption of
regulations. The committee members, as well as any
member of the public who is listening who wishes to
comment on the regulations should comment as provided
in the public notice. The notice as well as the full
text of the proposed regulations are available on the
department's website.... The public comment period
closes next Friday, January 26.
For the pending regulations, we cannot discuss how
they would be applied. Testimony today should not be
construed as any pre-determination of any final
regulations. Our presentation today is focused on
factual information about the DOR's recent and ongoing
regulations process."
9:08:31 AM
JOHN LARSEN, Audit Master, Tax Division, Department of
Revenue, Juneau, Alaska, introduced himself for the record.
MR. ALPER said in the last two legislative sessions two
major bills have passed that both fit into this realm of
tax credit reform, a ramping back from the more generous
historic program of providing direct support to exploration
and development, and he wanted to recap the content of the
bills as follows:
HB 247 passed in June 2016
Phased out Cook Inlet tax credits and reduced the
Middle Earth tax credits. Tax credits are still being
offered in Middle Earth.
? Extended Cook Inlet gas tax cap. It was scheduled to
sunset in 2022 and a new tax of $1/bbl cap was added
to Cook Inlet oil.
? Added sunset provisions, referred to as "graduation
provisions" to the North Slope gross value reduction
(GVR), the new oil reduced tax treatment that was
originally passed to be indefinite and is now
somewhere between 3 and 7 years depending on the price
of oil. That treatment will go away, and the oil will
"graduate" and begin to be taxed as legacy oil after
that point.
Inserted an annual cap on cash through the credit
system that a company could receive per-company, per-
year.
Created a resident-hire priority for allocating cash
payments in times of restricted revenues.
Added limited transparency with an annual report to
the public of how much cash was received by each
company in aggregate over the course of the year. The
first of those reports came out in April 2017 based on
2016 information.
? Increased the interest rate to just the production
tax for a period of three years, and then reduced it
to zero.
Cleaned up technical provision remnants from old
laws or things that weren't working properly that were
also passed with HB 247.
Adopted a regulation package that went through the
same process he is about to describe today for HB 111
and those regulations became effective January 2017.
9:11:24 AM
MR. ALPER said that HB 111 was in many ways more
aggressive, because it eliminated the regime of the state
buying cash tax credits:
HB 111 passed in July 2017
? Most credits were no longer eligible for state
repurchase after July 1, 2017, with the exception of
the refinery and LNG storage credits that have their
own built-in sunset in the next couple years.
The Net Operating Loss (NOL) (formerly known as the
carried-forward annual loss credit) credit (by far the
largest component of the cash credit program) was
repealed effective January 1, 2018.
It was replaced with a new system of carried-forward
lease expenditures. A large portion of the bill
detailed the treatment of how those carried forward
losses were to be calculated and eventually how they
were to be recaptured when a company brought their
field into production. One key provision was known as
the "ring-fence," the idea that these carried forward
losses can't be used until the underlying leases come
into production. Flexibility was given where the
taxpayer could choose how much they did or didn't want
to use in a given year to maximize their flexibility
to use any other tax credits or reductions they might
have available to them. Limitations specified that the
carried forwards could be used to reduce taxes below
the minimum tax.
A new provision was added to say that if they are
not used for 10 years, they begin to start to lose
value on a graduated scale referred to as a "down
lift."
9:13:28 AM
Because of the carving out of production tax versus
other taxes, interest rates were aligned among all tax
types administered by the Department of Revenue and no
sunsetting of the interest, which continues for as
long as the delinquency remains or an appeal, which
can go on for 10 years.
A new provision was added that credits can be
carried-back and used by the originator of the credit
or by the purchaser of the credit against a prior year
tax liability including offsetting interest and
penalties associated with past year liabilities. The
key limitation is the Alaska Constitution. The
Constitutional Budget Reserve Fund (CBRF) says the tax
liabilities related from an administrative proceeding
or a settlement for certain lawsuits must go to the
CBRF. That cannot be superseded by law. So, any past
year liabilities that fit the CBRF definition cannot
be offset with tax credits.
? Conditional exploration tax credits became a new
provision, because they often take a long time to
review for a variety of reasons, and once time and
money became issues, they were falling behind in the
queue in the line to receive cash payments. These
credits would allow a company to reserve its place in
line in advance of getting the final review and
awarding of those tax credits for exploration.
The seismic credit on the North Slope and Cook Inlet
had previously sunset before last year, but it remains
in Middle Earth and that was repealed January 1, 2018.
? Exploration credits in Middle Earth can now be used
to offset the explorer's corporate income tax. For
perspective, there is no production of oil and gas
from Middle Earth, yet. The hope is that someone finds
it and develops it. The companies that are doing that
work tend to be the regional Native corporations like
Ahtna. The exploration tax credits they are earning on
that work can be used to offset those companies'
corporate income tax liability.
Because the tax credit fund is no longer going to be
needed after the last credit is paid, which could be
any time between next year and 2026, a delayed
repealer is built in.
• Established the Legislative working group.
9:16:50 AM
MR. ALPER stated that the Governor signed it into law on
July 28 and the DOR realized it was too big to implement in
one set of regulations, in part because certain things
needed to be done relatively fast. The rules needed to be
in place by January 1 for a variety of reasons related to
the interest or the idea of carried back. But the carried
forward lease expenditures were very complicated and very
sensitive and needed more time to be developed, and frankly
didn't need to be entirely pinned down by January 1,
because no one was going to try to use them until the end
of the 2018. So, they split the package in half; the first
package was the carry-back of credits against a prior year,
interest rates, and most changes other than the new carry-
forward loss structure.
The second package was related to the carry forward lease
expenditures and related issues - how they are earned,
calculated, and allocated, and most importantly how they
are used once the field comes into production.
MR. ALPER explained that before either package was written
a pre-regulation scoping workshop was held. It was designed
to get input from the affected parties, primarily industry,
as to what they expected to see in the regulations, what
their understanding of the laws that passed was, and what
the hot button issues might be that needed more attention.
It had 22 attendees from industry, plus those on the phone,
and DOR staff. Comments were accepted after the workshop,
and the deadline was extended because the Alaska Oil and
Gas Association (AOGA) members have offices in Houston and
were impacted by Hurricane Harvey last summer. They
received comments from eight different parties, including
Senator Giessel and Representative Seaton.
9:19:15 AM
CHAIR GIESSEL said she appreciated the pre-regulation
scoping workshop, because it is a complex subject.
MR. ALPER stated the meetings were helpful but not
required. They like to have them when possible. Sometimes,
a ticking clock that makes it harder. In this case, the
bill passed with retroactive regulatory authority. Well,
they can't go backwards to 2010, but should the regulations
take effect because of all the process after the effective
date of the bill, January 1, 2018, the regulations can be
taken back to the effective date of the bill. This is the
important authority that gives them the leeway to spend an
extra few weeks in process. He pointed out that bills don't
usually pass in July; they usually pass in April or May and
that couple of months makes a big difference.
9:20:27 AM
Slide 7: "Initial Regulation Process to Implement HB 111"
MR. ALPER said the scoping workshop identified key issues
to be addressed in drafting the regulations. Examples
include:
1. Defining exploration expenditures in the context of the
"ring fence." When the expenditures developing a field are
ring-fenced you know those expenses are tied to that field.
But what if you are exploring: drilling multiple
exploration wells and only one of them finds something, is
there a mechanism for the company to be able to regain
value from the failed exploration wells? The language
provided was "reasonably related" to a lease or property,
and that had to be fleshed out.
2. Another issue was determination of what the ring fence
is. The triggering provision for the use of carried
forwards was when a field came into "regular production."
That is an Alaska Oil and Gas Conservation Commission
(AOGCC) definition - not from the tax statutes - and the
idea that HB 111 talked about regular production from a
lease or property needed to be aligned with the AOGCC
reference to production from an "individual well."
3. Determining and allocating the amount of carried-forward
lease expenditures when a producer has both producing and
nonproducing properties and/or exploration expenditures
that might put them into a loss situation for the overall
year and making sure that only the amount of the loss was
tied up in the ring fence and not the entirety of the
expenditure on the new development.
4. Another interesting concern was with gas used in-state
(GUIS). They use the term "segment," which is a taxable
area; for instance, North Slope oil and gas is a segment.
In other words, the taxes are calculated differently for
each segment and lease expenditures get allocated for each
segment. Gas used in-state is a separate segment and pays
tax at the Cook Inlet gas tax cap rate of 17 cents. But
because of that, the lease expenditures have to get
allocated to the gas used in state. That became a little
complex and industry wanted to know more about how that was
done.
5. Finally, the retroactive regulation question: he thanked
them for giving DOR that authority to allow a more
interactive drafting process. They are still not done,
presuming they get to the public comment deadline and
redraft the regulations, then the DOL does its review, then
it goes to the Lieutenant Governor, and finally they get
filed and made official 30 days after they are signed. It
will be somewhere in March before they are done, but these
regulations will have the effect of law on January 1
because of that retroactive authority.
9:23:51 AM
Slide 8: "Necessary Steps in the Regulations Process"
MR. ALPER said the regulations process "is a lot of statute
and a little bit of custom." An administrative order (AO)
recommended these workshops but did not mandate them, as
well as a discussion of the pre-official draft. That AO was
used to say let's have a workshop.
The second step was publication of draft language for
packet two. The draft language has a tightly prescribed
series of steps: published in a newspaper of general
circulation, posted on the Alaska Online Public Notice
System, furnished to the department's interested parties
list and the Department of Law, furnished electronically to
all state legislators and the Legislative Affairs Agency,
chairs of the standing committees with jurisdiction over
the subject, the Administrative Regulation Review
Committee, and Legislative Council. Approximately 140
people are signed up for the Department of Revenue's
"Interested Parties" list.
9:25:11 AM
Slide 9: "Necessary Steps in the Regulations Process"
The Administrative Procedures Act, AS 44.62.190, requires a
minimum 30 days of public notice before the adoption,
amendment, or repeal of a regulation. Although not
mandatory, the department typically holds a public hearing
for regulations on oil and gas production taxes. Ideally
that is done somewhere in the middle of the public comment
period, which provides an opportunity for interested
parties to evaluate and incorporate information from the
public hearing into their written comments. After the
public comment deadline, all comments received are
published on the department's website.
9:26:26 AM
CO-CHAIR HOFFMAN asked if the public record includes who
made the comments.
MR. ALPER answered in the affirmative.
MR. ALPER continued discussing slide 9. He said prior to
drafting final regulations, the Administrative Procedures
Act requires that the department must consider all public
comments received and to keep a record of its use or
rejection of them. The document is called Affidavit of
Agency Record of Public Commentand is submitted along
with the final adopted regulations.
9:27:38 AM
Slide 10: "Necessary Steps in the Regulations Process"
MR. ALPER said the draft is revised into a final regulation
proposal and adopted and signed by the DOR Commissioner and
then it goes to the DOL to ensure that the proposal is
within the authority conferred by the department by the
law, itself, that it's not conflicting with other statutes,
not repeating any statutes, and making sure the regulations
are not over-reaching. That usually takes a couple of
weeks.
The legislature is informed of pending regulations and has
the option to review. Typically, the Department of Law
makes technical revisions to language and then the final
version is presented to the Lieutenant Governor for
signature. Then they are officially law 30 days after that
unless another date is specified.
9:29:08 AM
Slide 11: "Regulations Packet 1"
MR. ALPER said package 1 is everything except carry
forwards with the carry back provisions being the most
complex. These were signed by the Lieutenant Governor and
published, and by January 1, they were the law of the land.
He said the clear legislative intent was to strengthen the
secondary market, the ability of companies that are holding
cashable tax credits, where the state might not have cash
available, to be able to sell these credits to another
company who could then use them to offset their taxes. For
a variety of reasons, that market had not been used,
primarily because the state had been buying all that were
presented for about eight years, and there was no need for
it.
Once the demand was there, there wasn't very much market,
primarily because of low oil prices, and the potential
buyers of those credits, Alaska's major oil and gas
producers, didn't have enough tax liability to be able to
buy credits to further reduce them. But the intent of the
legislature was to strengthen that secondary market.
This is important, the typical past year tax liability is
in an audit. It is clearly an administrative proceeding -
the court has said - and that money goes to the
Constitutional Budge Reserve (CBRF). However, a major
settlement is still being finalized on the Trans Alaska
Pipeline System (TAPS) tariffs going back to about 2010/11.
The Attorney General has said that is not litigation
related to tax; it is related tariffs, and the fact there
are more taxes is a secondary impact of it. If you can
imagine, the allowable tariffs were being reduced for oil
through the pipeline and that means the value of the oil up
at the well head is a little bit higher. That higher value
translates through as a larger royalty liability and a
larger tax liability. That tax liability did not have to go
to the CBRF, therefore creating a little bit of a window
for a secondary market where companies who might owe that
tax could purchase tax credits to offset that liability, an
estimated $165 million for 2011/12/13 they hope will be
used to absorb some of the hanging tax credit balances that
are out there.
MR. ALPER stated that some changes were made prior to the
regulations being final. The conditional exploration
certificates were issued right away. The department had
close to $100 million worth of exploration applications
sitting in the work pool, and all of those were able to be
2017 tax credit certificates.
As they are ranked for cash, the process is to first pay
off all of the 2016 originating certificates, then pay off
all the 2017s, and all of the 2018s. Within the 2017s is
where the local hire rank order will come in, but the first
and most important rank order is by year of origin.
9:34:02 AM
CHAIR GIESSEL asked if it was possible for the division to
deny a conditional credit.
MR. ALPER replied that the guidance per HB 111 is that the
conditional credit is given when it's requested, so there
is no review initially. But the conditional credit cannot
be sold or cashed. It's simply a place holder. They can't
get any money until the department has issued it. The audit
process will kick in between the issuing of the credit and
the finalizing of it, and that is where some adjustment is
made or perhaps denying them outright if for some reason
the applicant is not eligible. Up until that point, the
conditional certificate is for 100 percent of the amount
requested.
CHAIR GIESSEL asked the likelihood of a conditional
application being denied.
MR. ALPER replied it is very rare for a conditional
application to be denied. He explained to qualify for the
exploration credit expenditures have to be from outside of
a unit boundary; sometimes an application is a hybrid for,
for instance, a seismic shoot where some of it is inside a
unit and some of it is outside, and the acreage inside the
unit has to qualify for the operating loss credit or
something similar. So, they have to be reallocated.
A reserve fee for a rig that never got used during the year
can't be credited in that year, but if the rig is used in a
subsequent year, those costs can be brought forward and
claimed then. Adjustments can always be made, but the
auditors are much deeper into those details. He could say
that it would be very unusually for a credit to be rejected
outright.
9:36:36 AM
CHAIR GIESSEL asked if the conditional credit was accepted
with the adjustments.
MR. ALPER replied that once the adjustments are made, it is
no longer a conditional application. For instance, for a
$10 million credit application, the department will give
them a $10 million conditional credit to reserve their
place in line. It's worth only a $9.5 million but now it's
a real credit and it's eligible for cash.
CHAIR GIESSEL asked now that real credit that has been
reviewed goes into the queue in priority, is it possible
they moved from slot 4 to slot 10.
MR. ALPER recalled that DOR gave out 12 conditional credits
in August. Of those 12, 7 were finalized before December
31, anyway. So, it wouldn't have mattered, but for the
other 5 who won't be getting their final certificate until
sometime in 2018, they are reserving their identical spot
in the 2017 pool.
No 2017 certificates have been purchased yet and there are
about $400 million worth of 2016 certificates on the books.
The next $400 million appropriated by the legislature will
pay off those 2016 certificates before getting to any of
the 2017 certificates. The caveat is that the
administration will possibly bond for this and pay them off
in a different manner.
MR. ALPER stated that hypothetically, if the legislature
appropriated $500 million in the coming budget cycle
towards tax credits, that would entirely pay off the 2016
pool and the first $100 million of the 2017 pool. Then they
would get to the rank order question. Under the current
rules, the priority among the 2017 pool would go to those
with the highest Alaska resident hire.
CHAIR GIESSEL said she appreciated the clear explanation.
9:39:21 AM
SENATOR BISHOP wondered if he had ever seen a positive
adjustment for conditional credits.
MR. ALPER answered yes, although it's less common, and not
just for exploration credits. All credit applications are
reviewed and occasionally a company has made an error in
the state's favor and the state will correct it.
CO-CHAIR MACKINNON asked if Mr. Alper was at liberty to
share the legal opinion from the Attorney General on the
department's ability to divert money from the CBRF to pay
tax credits.
MR. ALPER replied that he did not know if he could share
the actual document, but he had shared the content of it a
couple slides ago.
9:40:46 AM
MARY HUNTER GRAMLING, Assistant Attorney General, Natural
Resources Section, Department of Law, commented that she
didn't have authority today to say whether they would be
able to provide that document to the committee. She could
say that it was in part based on a recent Alaska court
decision in Wielechowski versus State where the state took
the position that the Permanent Fund as a dedicated fund
should be construed narrowly. When they were factoring a
dedicated fund analysis into HB 111, the CBRF is also a
dedicated fund and should be construed narrowly, as well,
just to be consistent. The bill passed, and the decision
came down on another dedicated constitutional fund, and DOL
took another look at it.
CO-CHAIR MACKINNON said she could only speak for herself
regarding the use of the CBRF and moving funds away from
deposit, that the legislature has tried to pay tax credits
two times through the CBRF and the Governor has chosen to
veto them. So, she needed to see that legal opinion to see
if it's consistent with the case she is referring to.
MS. GRAMLING stated that sections 9, 11, and maybe 16 of HB
111 incorporate some CBRF language and that is why that
interpretation was required to implement this bill. That
carry back concept was not a suggestion by the
administration. Mr. Alper said it had to be in there, but
she didn't know if that is necessarily true. It is the law
now that carry backs can't divert money that would
otherwise go to the CBRF. As a matter of law, she didn't
know if that restriction could be deleted.
CO-CHAIR MACKINNON clarified that she wanted to pay back
the tax credits and wants to be legally consistent with how
funds are deposited into the CBRF.
9:44:09 AM
SENATOR BISHOP said what got his attention on this was the
TransAlaska Pipeline System (TAPS) valuation that drove the
$165 million and it sounds like a tariff is not a tax. He
needed some clarification on that.
MR. ALPER stated that a tariff is not a tax; it is a
commercial transaction paid from the company shipping oil
to the company that owns the pipeline. The CBRF receives
revenue resulting from an administrative proceeding or
settlement of litigation and a whole series of clauses,
related to tax. Because the tariff isn't a tax, the guts of
this AG's opinion was they didn't pay enough taxes, and
those lawsuits definitely go to the CBRF. But because it's
really a tariff issue, the tax indirectly impacted the
tariff calculation and there wasn't a hard requirement to
divert that money to the CBRF.
9:45:48 AM
Slide 12: "Regulations Packet 2"
MR. ALPER said this is the regulations packet that is in
the public review period right now. The "carried forward
annual losses" had some issues: the allocation among
properties and segments, application of the "ringfence,
and taxpayer flexibility on use.
One provision that evolved working through the legislative
process had to do with: ok, I've spent a billion dollars
and I'm holding this, and now my oil field is in
production. How do I use that billion dollars per year? One
version of the bill said it could be used to get down to
the minimum tax level, but the problem with that is what if
that means I can't use my per barrel credits. What if my
tax liability per the tax calculation is $500 million, but
my actual tax owed is only $100 million. So, I'm going to
have $400 million worth of per barrel credits. The way that
provision was written they would have lost the ability to
use that $400 million. So, by allowing maximum flexibility
for the taxpayer, they get to preserve their ability to
carry those lease expenditures forward into future years
and not potentially lose that value.
He said that Mr. Ruggiero, the LB&A consultant, frequently
testified about maximizing the ability to use carry
forwards, because cost recovery is an essential tenet in a
net profits-based system. And the legislature went to the
maximum degree to preserve the ability for cost recovery in
the final language. That is in AS 43.55.165(m) or (n), the
new subsections that were added to the lease expenditure
sections of law.
MR. ALPER said the "downlift" calculation is interesting in
what triggers it: if lease expenditures are not used for 10
years, they begin to lose value at 10 percent of that
amount per year. But the syntax of that was subjected to
competing ideas: is it 10 percent of the entire value that
is lost every year or 10 percent of the remaining value?
For example, if you have 100 and you lose 10 percent, the
next year you have 90. If you still haven't used them the
year after that do you go down to 80 or do you use 10
percent of the 90 and go down to 81? Given the way the
section was written, the answer was 81, but some preferred
80. So, the regulations were written to assure the 81
definition.
Also, a fair amount of time was spent on the idea of
"reasonably related." The regulation package made available
to the committee is long and a lot of the pages in it are
examples for illustrative purposes to interpret the intent,
and in many ways are the most helpful part of the
regulations package. The department is trying to
appropriately interpret the will of the legislature in the
guidance they gave to through the bill, itself.
Where are we in the process? Mr. Alper answered that the
discussion draft went out. This package has already had two
drafts, a preliminary draft went out on November 18th, and
because it wasn't an official public notice, they could
talk freely with companies about it, and get their input,
and that was very helpful in cleaning up the public notice
of the official draft package 2 which didn't happen until
December 21. Mr. Alper said they decided to have the
hearing during the holidays because it was important to get
it done. They apologized to industry and the legislature,
but they ran out of calendar and wanted to get it done
before the session. The public comment period closes in one
week.
9:51:00 AM
CHAIR GIESSEL considered the statement from the Department
of Law and said that the regulation package 2 actually is
not something the committee could comment on today, because
it is still out, and this is not official public testimony.
MR. ALPER responded that she could comment on anything she
wants, but she might not be satisfied with the depth to
which they could respond to them.
CHAIR GIESSEL asked if they were free as citizens to submit
written comments to him on that package.
MR. ALPER answered yes.
SENATOR VON IMHOF referenced slide 11 and the language,
"additional tax liability due to the recent TAPS settlement
is not required to go to the CBR," and asked if the TAPS
settlement going into the CBR generated any interest,
because she sees regular additions into the CBR financial
statements.
MR. ALPER answered that ultimately the settlement changed
tariff calculations and reduced the allowable amount of
transportation expenditure for the oil that was shipped in
the affected years. That reduced transportation cost
filtered its way through the tax calculation and lead to an
additional tax liability. Then, yes, interest is charged on
that tax liability.
He explained that the authority granted by the bill that
passed last year stated not just the tax but the associated
intertest could be offset by transferred tax credits. If
for example, company X owed $20 million in taxes and turns
into $30 million with all of that compounded interest, they
could go out and buy $30 million worth of tax credits from
another company for, maybe, $25 million and use that to
offset the full $30 million obligation.
9:54:29 AM
CHAIR GIESSEL asked about regulation language relating to
sections 6, 9, and 16 in HB 111 that refers to the carry-
back tax credit being applied to satisfy a tax interest
penalty, fee, or other charge; yet the regulations have
much more limited language that refers only to the tax
interest and/or penalty and left out "fee or other charge"
in various places in section 305(c). She asked Mr. Alper
when the department writes the actual language if they
focus on extracting the actual language from the bill that
passed the legislature. In HB 111 it was in Section 6 AS
43.55.023(c)).
MR. LARSEN answered that the language reads: "[3) may,
regardless of when the credit was earned, be used to
satisfy a tax, interest, penalty, fee, or other charge
that" and prohibitions follow under paragraphs (A) and (B).
Paragraph (A) says, "[except for] a surcharge under AS
43.55.201 - 43.55.299 or 43.55.300...." He explained that
the reason the language was proposed and adopted as it was
is that the department is not aware of any additional fees
other than the principal portion, the interest, and the
penalty. The penalty would be considered to be a part of
the administrative proceeding because it normally falls out
from the issuance of a letter from the department for
something like a late filing. However, the language of the
regulation says if someone self-reports a penalty - for
example, if they knew they misfiled or filed late - and
thereby avoid the administrative proceeding (letter from
the audit department) they can use the carry-back credit to
pay that portion of the penalty.
9:58:32 AM
CHAIR GIESSEL said her fundamental understanding of that
was the rationale for leaving out the "fee or other
charges" is at this point the tax division doesn't charge
any other fees or other charges.
MR. ALPER clarified that Mr. Larsen said in the reference
to AS 43.55.200-300 that the surcharge is the nickel a
barrel conservation surcharge that goes to the Spill
Cleanup and Response Fund that could be construed as a fee,
but that was specifically carved out from this. So, the
chair is correct, the department doesn't have any other
fees.
CHAIR GIESSEL said if the department were to impose any
other fees at some point in the future, the legislative
intent is the application of the statute in that case for
future fees to be offset by credits, but the word "fee"
isn't in the regulations.
MR. LARSEN added that he was unsure under what authority
the department would impose any other fees. If fees were
added, at that point in time, that "fee or other charges"
language would probably be added to the regulation. In
working on language with the DOR and DOL the consensus was
that since there are no other fees that it was appropriate
to not include that language in the regulation now.
MR. ALPER added that if another fee was added, it would be
through legislation, and the appropriate regulation would
be added at that time.
10:01:00 AM
SENATOR VON IMHOF asked if the original intent of HB 111
was to disallow a carry-back tax credit from being used to
create a tax overpayment over a claim for a refund or was
the carry forward just going to be used a little bit each
year and then kicked forward until it was used up. She
recalled that the legislature didn't want to create that
restriction.
MR. ALPER answered the circumstance he was concerned about
and brought to the Senate Finance Committee's attention was
what if someone has paid their 2011 taxes in full but was
going to buy a tax credit and apply it to the 2011 taxes
that would now be overpaid, the cash refund being a
possible workaround to the limitation on cash through the
Tax Credit Fund. He had not perceived that as the will of
the committee, and in fact, Co-Chair MacKinnon read a
statement saying that was not the intent of the bill and
the department felt like it had clear guidance to make sure
to not create the opportunity for a purposeful overpayment
leading to a cash refund and implemented the regulations
that way.
SENATOR VON IMHOF said she understood the example of taxes
being closed and paid but what about taxes that are still
open? She remembers that six years of back taxes were still
under review. She asked if a company could apply a credit
to a tax audit that is still open.
MR. ALPER replied companies typically refile taxes multiple
times over the years because something changes. This TAPS
settlement is one example. What will actually happen in
practice - 2011/12/13 were high tax years and companies
were paying the state billions of dollars - is company X
thought it owed $1.1 billion and now they owe $1.2 billion.
The thinking would be to buy credits to pay that $100
million of incremental tax. If the tax account is open
because it is being audited, that audit is in the CBRF
restriction. It's offset-able anyway and it falls out the
carry back. If there had been a refile of some other sort
that leads to a tax liability, that tax liability can be
offset with these carry-backs. The department wants to make
sure if there is no refile and no indication of a tax
liability, disputed or otherwise, that the tax credits
could be applied to overpay something that doesn't exist.
He added that he might need a little more clarity on her
envisioned circumstance.
SENATOR VON IMHOF said he answered it. She believes that it
makes sense if due to a refile there is a subsequent
liability, yes, they ought to be able to use the tax
credits to offset that.
MR. ALPER responded that is he understood it; there has to
be liability, some justification in the math, that says the
liability exists.
SENATOR VON IMHOF said she understood and thanked him.
10:04:47 AM
CO-CHAIR MACKINNON asked if it is illegal to purposely
overpay taxes.
MR. ALPER answered not to his knowledge, but he wanted Mr.
Larson to answer that.
MR. LARSEN said he agreed with Mr. Alper.
CHAIR GIESSEL thanked the presenters for the overview. She
pointed out that the Administrative Regulation Review
Committee no longer exists, and that review is a function
being performed by the joint meeting today. She thanked the
committees for their time.
10:06:39 AM
CHAIR GIESSEL, finding no further comments, adjourned the
meeting at 10:06 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Sen Resources Agenda - Jan 19 - 2018.pdf |
SRES 1/19/2018 9:00:00 AM |
Sen Resources |
| SenRes SenFin Presentation from Dept of Rev - Regulations Re HB 111 - Jan 19 - 2018.pdf |
SRES 1/19/2018 9:00:00 AM |
HB 111 |
| HB 111 Reg Package Number 1.pdf |
SRES 1/19/2018 9:00:00 AM |
HB 111 |
| HB 111 Reg Package Proposed Number 2.pdf |
SRES 1/19/2018 9:00:00 AM |
HB 111 |