SENATE BILL NO. 158 "An Act prohibiting the imposition of municipal sales and use taxes on state construction contracts and certain subcontracts; and providing for an effective date." SENATOR CHARLIE HUGGINS, sponsor, spoke in support of the legislation and read from the sponsor statement. During the course of business in the last couple of years, subcontractors in the construction industry, who work in some areas of the state, have experienced negative financial impact due to the imposition of local sales taxes on state DOT/PF funded projects. In the case of a construction contract being awarded and a primary contractor doing business with the state, the state is the purchaser of those services and, as such, the legal incidence for the tax falls on the state. Based on the state's sovereign immunity and the fact that the state is immune from taxation no tax is owed. However, when a subcontract is awarded and a primary contractor hires another contractor to do work for him, the subcontractor is not working directly for the state, but for the original contractor, and in some cases a sales tax has been levied on the value of the subcontract. In one instance, on an Airport Project, a construction contract was awarded to Quality Asphalt Paving (QAP). QAP and Dimond Electric entered into a subcontract directly in connection with the project funded under the construction contract. Dimond Electric was assessed a sales tax of over $20,000 on the value of their subcontract. This tax was unexpected and not considered in their bid. The state cannot afford to have an increase in the cost of construction projects due to the levying of sales taxes on state construction contracts or subcontracts directly awarded in connection with the project funded under the construction contract. While all municipalities do not assess this sales tax the policy needs to be consistent statewide. SB 158 will prohibit the imposition of municipal sales and use tax on state construction contracts and certain subcontracts and remedy the inequity that exists. Senator Huggins explained that there would be no tax on the gross of a state construction contract. He observed that the Department of Transportation and Public Facilities has previously found that it was cheaper to pay the tax than to go through a change order. He asked the Committee to preserve the traditional way of transacting business. 5:52:02 PM Vice-Chair Stoltze spoke in support of the legislation. Senator Huggins stressed that the bill maintains the status quo. 5:53:38 PM STEVE BOYD, NATIONAL ELECTRICAL CONTRACTORS ASSOCIATION, ANCHORAGE, (via teleconference) spoke in support of the legislation and maintained that subcontractor work should be exempt from these taxes. 5:56:10 PM DAVID LANZ, PRESIDENT, DIAMOND ELECTRIC, (via teleconference) offered to answer questions. 5:56: 31 PM DENISE MICHELS, MAYOR, NOME, (via teleconference) referred to her letter in the members' packets (copy on file.) The City of Nome is opposed to SB 158. She asserted that the bill is punitive and unfairly restricts local control. The bill diminishes the existing statutory authority of local governments to raise needed revenues through the levy of taxes. Nome receives most of its revenue from self-tax and property tax. She observed that 40 percent of the property tax is exempt by state statute. Contractors use the municipality's services. Contractors are responsible for due diligences to see what fees or taxes are required in the community. The legislation would reduce the municipality's revenues. 5:59:04 PM KEVIN RITCHIE, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL LEAGUE, spoke in opposition to the legislation and referred to a letter from AML to the Committee (copy on file.) He stressed that municipalities must tax to survive. The tax base diminishes in small communities. Municipalities have lost state funds over the past 10 years. He maintained that the issue is not between the contractor and city. He maintained that the cost should come out of the overall cost of state or federal grants. He argued that the impacts are local and the tax benefits local citizens. 6:01:59 PM Representative Holm ascertained that Mr. Ritchie had never bid a contract. Representative Holm explained how a contract is marked up, and that the percentage has to be included. He inquired why the Alaska Municipal League would think it appropriate for tax dollars to be taxed. 6:04:03 PM Mr. Ritchie responded that in many cases federal money would come into play. He referred to Mayor Michels' statement of small communities struggling to provide basic services. He noted that tax dollars run a municipality. Representative Holm pointed out that this also applies to Anchorage. 6:07:23 PM Representative Kelly referred to the letter of April 26 from Kathie Wasserman. He asked Mr. Ritchie to explain the last paragraph: The bill summary states that the bill's intention is to "prohibit the imposition of municipal sales and use tax on a construction contract awarded by the state or ~ state agency, or on a subcontract awarded in connection with the project funded under the construction contract." This is misleading, as no communities impose a sales or use tax on a construction contract awarded by the state. This issue is ONLY about subcontract workers that have been hired by the contractor. Mr. Ritchie explained that no community taxes the full contract. The letter refers to subcontracts awarded in connection with the project. 6:08:57 PM Representative Kelly stated the bill's intent is to prohibit the imposition of municipal sales tax and use tax on construction contracts awarded by the state of Alaska or on the subcontractor awarded in connection with the project. He summarized that AML charges that this is misleading. Mr. Ritchie clarified that communities can't impose a sales tax on the general contractor, but can on subcontractors not awarded by the state. Representative Kelly continued to express concern. 6:11:35 PM THYES SHAUB, LOBBYIST, NATIONAL FEDERATION OF INDEPENDENT BUSINESSES, AGC, in support of the legislation. She emphasized that business likes to know what the rules are and have them applied consistently. 6:12:51 PM Representative Hawker MOVED to report SB 158 out of Committee with individual recommendations and the accompanying fiscal note. Representative Joule OBJECTED for discussion purposes. He stressed that the legislature must deal with municipalities and their financial issues. The bigger issue is how we are not sharing the wealth with those communities. Representative Joule WITHDREW his objection. There being NO further OBJECTION, it was so ordered. SB 158 was REPORTED out of Committee with a "do pass" recommendation and with a zero fiscal impact note by the Department of Commerce, Community and Economic Development. 6:14:29 PM Representative Joule spoke about future problems due to lack of revenue sharing. 6:16:03 PM