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." This was the second hearing for this bill in the Senate Finance Committee. SENATOR CHARLIE HUGGINS, the bill's sponsor, explained that business conducted in this State should occur in a stable and predictable climate. "A known" incident that "highlights the difficulty" encountered when this is not the case was when a subcontractor, conducting an approximate $400,000 State contract, was levied a $20,000 tax assessment from a local community. Senator Huggins continued that that incidence is becoming "a trend", as addressed in an Alaska Municipal League correspondence [copy not provided], which noted that three communities have adopted "a policy of collecting sales taxes from subcontractors doing business in their community regardless of the funding source". Those communities have retained legal representation in this regard. He warned that while the practice might be limited today, without being addressed, it could become a statewide issue. The potential cost of this practice "would place an undue burden on the State; it would be "unfair to contractors" were the Legislature "not to correct that situation". The solution proposed in this bill is simple: it would work for all parties; it would create a stable business environment; it would protect the State; and would clarify the rules in this regard going forward. "It is not punitive and does not seek to recoup any monies". 9:46:09 AM STEVE BOYD, Alaska Chapter, National Electrical Contractors Association (NECA), testified via teleconference from Anchorage, and noted that he was available to answer questions. 9:46:21 AM KATHIE WASSERMAN, Alaska Municipal League, spoke against the bill. She stressed that, "no municipality in the State taxes a contractor on a State job. This issue is about the tax imposed on a subcontractor, hired by the contractor". This legislation could expand the exemption to such things as the hotel bed tax or the meal tax charged to contractors while performing a State job. It could also "be extended to include a subcontractor hired by the subcontractor that is hired by the contractor. Sales tax is a local provision" and, therefore, "local governments should exert local control over those taxes. Restrictions on local sales taxes" currently exist through the local election process. The State has curtailed its municipal support that came in the form of such things as revenue sharing and capital matching grants while local community expenses relating to such as fuel and the Public Employees' Retirement System and the Teachers' Retirement System (PERS/TRS) have increased "dramatically". "Tax revenue is one of the few remaining revenue streams left to communities". Even thought the State is exempt from municipality property taxes, State "properties receive the same benefits and services as local property" taxpayers do. The decision as to whether or not to tax subcontractors should be made by the municipality. Were the imposition of such a tax to have "a detrimental affect on the economy of the community", local elected officials should initiate changes to those ordinances. Ms. Wasserman stated that the terms "consistency" and "stability" have been used throughout this legislation's proceedings, "yet the State has chosen not to impose any State taxes". That decision has been left to local communities. It would be impossible to incorporate a consistent taxation methodology as the more than 190 communities that do tax have "different needs, different resources, different locations; there is not and cannot be consistency in taxing". Oil companies that operate globally must familiarize themselves with different tax structures in each locale. "A nationwide tax would be more consistent, probably make things easier for oil contractors, but would it be great for the State of Alaska?" Ms. Wasserman reminded the Committee that the majority of Department of Transportation and Public Facilities (DOT) projects are conducted in either Anchorage or Fairbanks. The concern about large taxation on DOT projects therefore should be alleviated because neither of these two communities imposes sales taxes. In addition, most airport projects occurring in the Sate are typically 92 percent to 100 percent funded through Federal Aviation Agency (FAA) funds rather than State funding. In conclusion, AML is requesting that the Legislature "trust local communities to do what is right for our shared constituents". Senator Olson inquired as to how local communities address road maintenance issues such as broken asphalt that might result from heavy equipment used in DOT contract projects. Ms. Wasserman responded that the community where she resides has had to deal with such issues. In one case, the community had to address boardwalk damage with community general maintenance funding. Demands to the contractor for money to fix the damage would be inappropriate as all he had done was to "run the equipment" for a contracted project down the Boardwalk. Unfortunately the Boardwalk construction was inadequate for that type of use. Senator Olson inquired as to what other, oftentimes inadvertent, burden communities might have had to address in regards to subcontractors or contractors. Ms. Wasserman replied that typically when a contractor conducts work in a community, a certain amount of administrative work must be conducted by the city. This is usually not accounted for in the project expenses. It is acknowledged that the workers on the project do contribute to the local economy via such things as meal taxes and bed taxes, and other support of local businesses. However, "there is still a very big revolving seed of money where the majority of the money and the payroll" moves between the agency to the large contracting corporations. "The cities a lot of times certainly do not come out as well as other entities". 9:52:18 AM Senator Olson noting that during the April 13, 2005 hearing on this bill, he had asked Steve Boyd of the Alaska Chapter of NECA, whether a local building permit is required, as that building permit fee would assist in supporting associated city expenses. The reply from Mr. Boyd was that no local building permit was required for the contract work. To that point, he inquired to the reason that for the permit exemption. 9:52:39 AM Ms. Wasserman understood that State projects are typically exempt from the permitting process. Senator Olson pointed out however, that the contractor is a private entity. Ms. Wasserman surmised that when a contractor is working on a State project, the State exemption would apply. Senator Stedman stated that many communities have imposed a maximum tax limitation, of, for example, $1,000 or $500, as the total amount of tax that could be collected on a single sale. Therefore $1,000 might be the total tax amount collected on a one million dollar State contracted project occurring in a community with a local five percent sales tax. However, it should be noted that some communities do not have a limit. That is a local prerogative. Senator Stedman theorized a scenario in which the contractor might pay the tax on the entire project; however, due to the fact that most projects have multiple subcontractors, it might be feasible that each of those subcontractors would also be required to pay the local sales tax on work relating to that project. This would raise the issue of multiple layer or "double" taxation. While he agreed that the sales tax issue should be a decision of local governments, at some point, there is a concern when dealing with large capital projects that a local sales tax might be charged numerous times on the same project. 9:54:51 AM Ms. Wasserman appreciated the concern; however, countered that DOT could take the position "that this doesn't work for us", and, as a result, were negative affects to occur on the community then it could address the situation and make changes. Another option, which she believed would not occur as such jobs are sought after, is that contractors could decide not to accept jobs in various communities. In conclusion, the decision should be left to the community rather than DOT or the contractors. Co-Chair Green opined that the local community could also refuse a project if they felt that "the detriment to the community would be greater than the appeal". Senator Hoffman stated that the issue of double taxation could also apply to the purchase of, for instance, a case of apples. That product would be subject to multiple taxes ranging from the airport tax levied on the carrier delivering it to the community, the gas tax charged to the transporter delivering it from the airport to the store, or, it could be transported from the airport to the store in a rented vehicle to which a local tax would be applied. The store would than collect the local tax from the consumer who purchased the apples. It could be difficult to separate the various taxes in order to specify that only one tax would be levied. Co-Chair Green expressed that there is a "distinction" between the imposition of a local tax on a purchase of a product such as an apple and "the State paying millions of dollars for local projects … which money does not go to the project". That is the issue being addressed in this legislation. 9:57:40 AM Senator Dyson observed that "the sales tax on the services that a subcontractor provides"… differs "in order of magnitude" from the taxes placed on the sale of consumer goods such as apples. He agreed with Co-Chair Green's comment that the action of imposing a local tax on State resources that are being used to construct something of "significant value to the local community … sounds like the local community is looking for another way to bite the hand that is feeding" it or "providing a huge resource at very little direct cost to that community". Co-Chair Wilken moved to report the bill from Committee with individual recommendations and accompanying fiscal note. There being no objection, SB 158 was REPORTED from Committee with zero fiscal note #1, dated April 6, 2005 from the Department of Commerce, Community and Economic Development. 9:59:40 AM