HOUSE FINANCE COMMITTEE March 14, 1996 1:40 P.M. TAPE HFC 96-76, Side 1, #000 - end. TAPE HFC 96-76, Side 2, #000 - end. TAPE HFC 96-77, Side 1, #000 - #406. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:40 p.m. PRESENT Co-Chair Hanley Representative Martin Co-Chair Foster Representative Mulder Representative Brown Representative Navarre Representative Grussendorf Representative Parnell Representative Kelly Representative Therriault Representative Kohring ALSO PRESENT Representative Joe Green; Jeff Logan, Staff, Representative Green; Deborah Vogt, Deputy Commissioner, Department of Revenue; Bob Briggs, Assistant Attorney General, Department of Law; Dan Seckers, Alaska Oil and Gas Association; William Cotton, Executive Director; Judicial Council. SUMMARY HB 341 An Act establishing a tax court to consider and determine certain taxes and penalties due and collateral matters, and amending provisions relating to taxpayer challenges to the assessment, levy, and collection of taxes by the state; and providing for an effective date. HB 341 was HELD in Committee for further discussion. HB 362 An Act extending the motor fuel tax exemption for fuel sold for use in jet propulsion aircraft to fuel used in those aircraft for flights that continue from a foreign country. HB 362 was rescheduled to another time. 1 HB 373 An Act relating to educational benefits for family members of deceased members of the armed services. HB 373 was HELD in Committee for further discussion. HOUSE BILL NO. 373 "An Act relating to educational benefits for family members of deceased members of the armed services." Representative Martin spoke in support of HB 373. He stressed that the legislation will help dependents of those killed in the military during peace time as well as in war. He noted that the September 22, 1995 crash of the U.S Air Force AWACS Yukla 27 at the Elmendorf Air Force Base, killed 27 crew members and left 32 children from birth to 18 years of age. According to the sponsor statement the legislation is directed toward the surviving dependents of all Alaska military residents enlisted in branches of the Armed Services, including the Alaska National Guard and the Alaska Naval Militia. These surviving dependents will be entitled to a waiver of room charges through University of Alaska student housing and a $200 dollar per month stipend for each month of enrollment. Representative Martin provided members with Amendment 1 (Attachment 1). He explained that the amendment will make the legislation retroactive to September 1, 1995 to allow surviving dependents of the September 22, 1995, AWACS crash at the Elmendorf Air Force Base to qualify. Representative Martin MOVED to adopt Amendment 1. Representative Brown OBJECTED. She questioned the cost of the amendment. She noted that the $200 dollar a month stipend would be in addition to benefits already paid. Representative Martin emphasized that this money would cover books and associated costs. Representative Brown referred to the $13.6 thousand dollar fiscal note by the University of Alaska. Representative Martin stated that fiscal note would cover the cost of the legislation. In response to a question by Representative Grussendorf, Representative Martin noted that 13 of the surviving dependents in the AWACS crash would be eligible. Representative Brown expressed concerns regarding the level of obligation the State would incur under the amendment. Co-Chair Hanley summarized that under current statutes surviving dependents are eligible for tuition and fees. The 2 legislation would waive dorm costs and provide a $200 dollar per month stipend for each month of enrollment. Representative Martin emphasized that the legislation would cover other associated costs. He observed that children will come from all over the State and will need housing. Co-Chair Hanley pointed out that Alaskans were also killed in the Gulf War. He observed that surviving dependents of Alaskans killed during the Gulf War would not qualify under the amendment. He observed that there is one child that would fall in to this category. He suggested that it would be equitable to include this child under the provisions of the legislation. Discussion ensued regarding the dates of the Gulf War. Representative Brown pointed out that the cost of the amendment will increase over time. She expressed concern with financial costs associated with the legislation. Co-Chair Foster noted that Alaska State troopers are sometimes killed in the line of duty. He questioned if they should be added. Representative Brown observed that a war could increase the number of eligible individuals. She maintained that the defense of the country is the responsibility of the federal government, not the state of Alaska. Representative Navarre noted that the military burial allowance was eliminated. He stressed that he is sympathetic to the legislation. HB 373 was HELD in Committee for further discussion. HOUSE BILL NO. 341 "An Act establishing a tax court to consider and determine certain taxes and penalties due and collateral matters, and amending provisions relating to taxpayer challenges to the assessment, levy, and collection of taxes by the state; and providing for an effective date." JEFF LOGAN, STAFF, REPRESENTATIVE GREEN testified in support of HB 341. He gave a brief history of HB 341. He noted that similar legislation was introduced by the Governor. He observed that CSHB 341 (JUD) was a joint effort by the Administration, Representative Green and taxpayers. Mr. Logan observed that the commissioner of the Department of Revenue assumes several roles in relationship to 3 taxpayers. The commissioner interprets state tax law through regulations, enforces state tax laws through the audit process, issues assessments and selects a hearing officer to sit in judgement during the appeal process. Mr. Logan noted that CSHB 341 (JUD) would change the current system. Formal hearings would take place before an administrative law judge in the Department of Administration. Mr. Logan observed that the Administration and taxpayers are not in agreement regarding the requirement of legislative confirmation and the authority to bypass the formal review and go straight to Superior Court de novo. The status of taxpayer appeals already filed but unresolved is also in question. Mr. Logan provided members with a flow chart comparing CSHB 341 (JUD) to the current system (Attachment 1). DEBORAH VOGT, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE acknowledged that the state of Alaska is one of a minority of states that still resolves state corporate tax disputes in house. She observed that the Administration consulted with Paul Frankel, Attorney, New York on the issue of corporate tax disputes. Mr. Frankel identified three elements that should be provided for in legislation. He stated that: * 1. The taxpayer should be permitted to have a trial and de novo review before the tax in dispute is paid; * 2. The review should be independent from the Department of Revenue; and * 3. The review should be before tax professionals. Ms. Vogt noted that these three points were included in the Governor's bill, HB 427. House Bill 427 was merged with CSHB 341 (JUD). She discussed issues that are not in dispute: * Review would be independent from the Department of Revenue by an administrative law judge; * Administrative law judges are appointed for a number of years and dismissed for cause only; and * Administrative law judges must be members of the bar and have some expertise in the tax area. 4 Ms. Vogt referred to the scope of review on page 4, lines 11 - 21. The administrative law judge would resolve the question of fact by preponderance of the evidence or, if a different standard of proof has been set by law for a particular question, by that standard of proof. She noted that the Administration was concerned that the administrative law judge not substitute their judgement for tax policy questions that belong to the commissioner. She acknowledged that there will never be a clean line between policy and law. Ms. Vogt observed that the burden of discovery was adjusted. The legislation provides that the parties submit a plan for discovery to the administrative law judge for approval. The plan has to include stipulations of fact. The parties have to perform their own legislative history research. Taxpayers cannot ask the State to produce all the legislative history of a bill. She noted that there were items that were not included in the committee substitute. Ms. Vogt noted that there are two issues on which the Administration, Sponsor and taxpayers do not agree. She observed that CSHB 341 (JUD) provides that an administrative law judge will be appointed by the Governor and confirmed by the Legislature. She noted that the Constitution does not allow an employee in the Department of Administration to be confirmed. To allow Legislative confirmation, an administrative law judge would have to be a member of a board. The committee substitute would create the Board of Tax Appeals. She emphasized that the creation of a board will significantly increase the cost of the bill. The Governor envisioned one administrative law judge and a half- time clerical person in the Department of Administration. A board would involve at least two administrative law judges, a full-time clerk, rent and office costs. Ms. Vogt provided members with Amendment 1 by the Administration (Attachment 1). She explained that under Amendment 1, the Judicial Council would be asked to review candidates and make recommendations to the Governor. The Governor would appoint and the Legislature would no longer confirm administrative law judges. Ms. Vogt stated that the second area of contention revolves around the fact that a taxpayer can avoid the administrative law judge proceeding and go straight to the Superior Court for a de novo review. The Administration opposes this provision. She emphasized the tax expertise and efficiency of administrative law judge review. She stressed that judges will set precedents in regards to the tax law. She maintained that tax precedents should be set by someone who studies and likes taxes. 5 Ms. Vogt referred to transition provisions. She observed that some tax payers are not satisfied with these provisions. In response to a question by Representative Kelly, Ms. Vogt stated that there is not enough work for more than one judge. She pointed out that most of the major tax cases have been settled. BOB BRIGGS, OIL GAS AND MINING SECTION, DEPARTMENT OF LAW echoed concerns expressed by Ms. Vogt. In response to statements by Representative Therriault, Ms. Vogt emphasized that the trial should take place in front of a tax expert. She acknowledged that many cases will still be taken to the Superior Court. She stressed that the Superior Court will utilize the administrative record provided by the administrative law judge hearing. (Tape Change, HFC 96-76, Side 2) DAN SECKERS, CHAIRMAN, TAX COMMITTEE, ALASKA OIL AND GAS ASSOCIATION (AOGA) testified in regards to CSHB 341 (JUD). He noted that AOGA is a trade association whose 19 member companies account for the majority of oil and gas exploration, production, transportation, and refining and marketing activities in Alaska. He maintained that the present tax appeal process in Alaska is seriously flawed in practice and denies taxpayers the opportunity to have their tax appeals heard and decided by a truly independent and impartial tribunal. He emphasized that AOGA has worked with the House Resources and Judiciary Committees and the Administration to develop a consensus bill which would improve the process. He observed that consensus was reached in many areas of the Judiciary Committee Substitute, including some areas which were heavily debated. However, two major areas of contention remain. One is legislative confirmation of the administrative law judges and the other is the option for taxpayers to proceed directly to Superior Court. Mr. Seckers discussed legislative confirmation. He noted that AOGA supports legislative confirmation of administrative law judges. He asserted that confirmation is appropriate to ensure that these people are qualified, capable, and fair since they may decide cases involving tens or even hundreds of millions of dollars in tax claims. He pointed out that confirmation allows for public comment on a candidate before the decision to appoint him or her becomes final. He emphasized that this ensures that if anyone is proposed who has demonstrated bias or similar improper conduct in the past, there will be an opportunity to make 6 people aware of those facts before the appointment becomes final. He added that confirmation prevents any question of improper influence by the Executive Branch over the administrative law judges through the power to appoint and reappoint them. Mr. Seckers reviewed Amendment 1. He observed that Amendment 1 would provide for an open and public process through the Alaska Judicial Council, which would review candidates, receive public comments, and present a list of at least two "finalists" from which the Governor would make the final selection. He stated that AOGA has not had sufficient time to review this proposal. Mr. Seckers discussed the option for taxpayers to appeal the informal conference decision directly to Superior Court. He stated that this is an area of disagreement. He maintained that Superior Court judges are competent professionals who have responsibility for hearing very complex cases, such as royalty and commercial litigation. In addition, under current law, Superior Court judges review the formal hearing decisions of the Department of Revenue and, under the proposed bill, would review the decisions of the administrative law judges. Mr. Seckers stated AOGA agrees with the Administration that most taxpayers will prefer having the specific tax expertise and procedural rules of the new system of administrative law judges. He stressed that there may be times when it would be more efficient and expedient to proceed directly to court. For example, when it is clear that a particular issue will likely be appealed to the Superior Court and beyond, the taxpayer may prefer to proceed directly to court to avoid the time and expense of going first to an administrative law judge and then to court. He stressed that if a dispute includes issues that an administrative law judge cannot rule on, such as constitutional issues, it would make more sense to allow a direct appeal of the taxpayer's case to the forum where those issues can be dealt with. Mr. Seckers disagreed with the Department of Revenue's suggestion that the option to go to court be restricted solely to constitutional issues. Tax cases generally involve factual determinations and legal determinations. A legal position is often supported by a statutory argument and a constitutional argument. He maintained that under the Department's proposal, for a disputed tax position, the taxpayer and the Department of Revenue would have to present the disputed facts and the statutory argument to the administrative law judge and present the same disputed facts and the constitutional argument to the Superior Court. Thus, under the Department's suggestion, for a given tax 7 dispute, it is possible that the administrative law judge could decide the facts in favor of the taxpayer but rule against the taxpayer on the statutory argument. The Superior Court could decide the same facts against the taxpayer but rule in favor of the taxpayer on the constitutional argument. He asserted that it is unclear what would happen next under the Department's suggestion. He maintained that at best, the Administration's constitutional limitation is inefficient and costly. Mr. Seckers noted that Mr. Paul Frankel mentioned in his testimony before the joint hearing of the House Judiciary and Finance Committees on February 29th, that the federal tax system offers taxpayers a choice of forums. He stated that he is not aware of any states that limit the taxpayer's option to go to court on specific issues. Mr. Seckers alleged that the option to go to court would not cost the State additional money and may result in reduced expenditures. He stated that in some instances an election to go directly to Superior Court would eliminate review of an administrative law judge's decision by the Superior Court. The Judiciary Committee Substitute also clarifies that the standards of review to be used by Superior Court judges under this option would be the same as under the administrative law judge system. He stressed that this check and balance safeguards the fairness and independence of the process. Mr. Seckers discussed the transition provisions of the bill. Both AOGA and the Department of Revenue agree on the principle that taxpayers who are still in the preliminary proceedings of the old formal hearing process should be allowed to use the new procedures provided if doing so would not entail an undue amount of wasted or duplicate time and effort. Mr. Seckers concluded that AOGA strongly supports the Judiciary Committee Substitute for HB 341. The reform of Alaska's present tax appeals system remains a priority of AOGA members. He maintained that the legislation will provide real reform to tax appeals. Representative Navarre asked if issues can be divided between administrative law judges and the Superior Court. Mr. Seckers responded that the legislation does not provide for division of a case. He expressed concern that there would be duplication of arguments. Representative Navarre asked if the full argument would have to be presented to the administrative law judge if there were issues that were clearly constitutional. Mr. Seckers 8 stressed that issues are not just clear cut. He stated that issues are factually determined. Representative Navarre expressed concern that the administrative law judge would be preempted after one adverse decision. He questioned if the legislation, absent direct appeal to the Superior Court, would be better than the status quo. Mr. Seckers did not believe the administrative law judge would be preempted. He added that "if the administrative law judge system is going to be as fair and impartial as it is claimed it will be and if the decision is as well reasoned, then there is no evidence to suggest, or reason for a taxpayer to suggest that any answer would be different in any other court." He noted that there are disincentives for a taxpayer to go directly to Superior Court. A bond must be posted to go to court. Under the current system and the proposed bill the taxpayer can go to informal conference, have a trial de novo in front of the administrative law judge, appeal to Superior Court and then appeal to the Supreme Court. This provides the taxpayer with four opportunities to present their case. If they went straight to Superior Court they would only have three chances to present their case. He maintained that the option to go directly to the Superior Court makes certain that the administrative law judge system stays fair and impartial. He maintained that the current system is not a level playing field. WILLIAM COTTON, DIRECTOR, ALASKA JUDICIAL COUNCIL testified via the teleconference network. He stated that the Council is neutral regarding the legislation. He expressed a desire to work on the language requiring the Council to make recommendations. He noted that there would be some additional cost involved. He estimated that a temporary secretary would have to be hired for a week or two. In response to a question by Representative Brown, Ms. Vogt explained that the informal conference is optional under existing law. The informal conference would be mandatory under the legislation. The bill includes provisions which allow the taxpayer or the Administration to ask for a schedule for the informal conference to be concluded in section 11, page 15. The informal conference decision would be written by the informal conferee through the Department of Revenue. They would be separate from the assessment. Representative Parnell questioned if recommendations should come from the Judicial Council. Ms. Vogt envisioned that the Judicial Council would publish the list of applicants and solicit comments from the public. Representative Parnell asked the policy behind not providing a choice of form. Ms. Vogt responded that the 9 Administration feels strongly that an administrative body through which all claims must go is the best way to ensure integrity in the tax system. Ms. Vogt expressed concern that taxpayers that do not have a good case would try to avoid the expertise of an administrative law judge. Ms. Vogt pointed out that a Superior Court appeal from an administrative decision is a narrower scope than a second appeal. She emphasized that Superior Court review would be cheaper because it is more informal. She noted that under the legislation the administrative law judge would take control of discovery. Mr. Seckers asserted that it is more expensive to go through four levels of review than through three levels. He maintained that, although trial costs would be less for an administrative law judge, a trial would still be before the Superior Court on review. Ms. Vogt recounted a case in which she was involved. In this case, the Superior Court costs were less than $60.0 thousand dollars while administrative review took seven weeks and cost more than $1.5 million dollars. She emphasized that the Superior Court hearing is a brief. She stressed that if the trial had been held in Superior Court the total cost would have been much greater. In response to a question by Representative Brown, Ms. Vogt explained that the Superior Court judge is going to substitute judgment for that of the hearing officer or administrative law judge. The hearing officer will find and organize facts, make determinations of facts and the law of the case. The Superior Court would only set questions of fact if they are not supported by substantial evidence. Mr. Briggs pointed out that under As 43.05.475 on page 8, that a final administrative decision has the force of legal precedent unless reversed or overruled. He noted that a Superior Court decision could over turn the administrative law judge's decision without being published. Other taxpayers would not know that the precedent by the administrative law judge had been overturned. He suggested that this problem can be resolved by deleting the direct appeal to Superior Court. He added that the Superior Court decision could be published under 43.05.470. Mr. Seckers did not think the legislation would create confusion. Ms. Vogt pointed to the magnitude of Alaskan tax cases. Mr. Seckers reiterated OAGA's position is support of the ability to take cases directly to Superior Court. In response to a question by Representative Parnell, Ms. Vogt compared procedures under the Workers' Compensation Board. Employees must take cases to the Workers' 10 Compensation Board. Representative Parnell questioned what would be gained by requiring taxpayers to come before an administrative law judge. Ms. Vogt responded that tax expertise would be provided by the administrative law judge. Mr. Briggs pointed out that administrative remedies have relaxed rules of procedure. He maintained that it would be more efficient to pursue remedies administratively. Co- Chair Hanley asked the advantage of going directly to court. Ms. Vogt responded that the concern is that a randomly picked Superior Court judge would not have tax expertise. She asserted that taxes are the most important attribute of sovereignty. Mr. Seckers stressed that Superior Court judges are competent professionals. He maintained that a complex royalty case is no more or less complicated than a tax case. Representative Brown asked if the Alaska Court System's fiscal note would apply to CSHB 341 (JUD). She noted that the fiscal note states that it does not reflect jury costs. The fiscal note assumed that the bill would be amended to clarify that the de novo trial is before a judge, not a jury. Ms. Vogt explained that the bill was amended to clarify that the Superior Court judge would sit without a jury. Representative Brown noted that the fiscal note concludes that many taxpayers would prefer to go directly to court rather than utilize the Department of Revenue's formal procedure followed by an on the record appeal. Mr. Seckers stated that he did not anticipate many taxpayers taking their cases directly to de novo hearings. He pointed out that there are no cases currently before the Superior Court. He maintained that these cases would be exceptional and could be funded through supplemental requests. In response to a question by Representative Therriault, Mr. Seckers explained that bonds are posted on the amount in dispute. Mr. Briggs observed that the bill requires that the taxpayer pay the entire undisputed amount. Only the part in dispute is bonded. In response to a question by Representative Therriault, Ms. Vogt acknowledged that if all taxpayers went straight to court, an administrative law judge would not remain busy. She clarified that the Administration anticipates that the number of tax cases going to trial would be the workload for one judge. 11 Ms. Vogt referred to the bonding requirement, page 16, line 32 through page 17, lines 1 - 12. She observed that this applies to administrative and judicial cases. She recommended that bonding requirements be changed to eliminate the bond for the administrative law judge proceeding. Mr. Seckers pointed out that there are provisions in the bill that allow administrative law judges to be assigned to other administrative appeals. CHRIS CHRISTENSEN, STAFF COUNSEL, ALASKA COURT SYSTEM testified that the Alaska Court System fiscal note submitted to CSHB 341 (RES) would be applicable. He estimated that the bill would apply to approximately 24 cases. He emphasized that a Superior Court appeal is much cheaper than an administrative appeal. He noted that the fiscal note is based on the assumption that a sizable percentage of the 24 cases would go directly to court. Hearing time could be 6 to 8 weeks. The note reflects the cost of bringing a judge out of retirement to cover other cases as needed. The pro tem judge would be paid the difference between his retirement and salary. In response to a question by Representative Therriault, Mr. Christensen observed that the Court System anticipates that since persons are fighting for the right to go straight to a de novo hearing that they would utilize the right. Ms. Vogt noted that AS 44.62.560 permits the judge to hear all or part of the matter de novo. She asserted that judges almost always choose to hear cases on the record. Mr. Seckers pointed out that taxpayers receive a de novo hearing below. He emphasized that the legislation will provide for only one de novo hearing. He stressed that the majority of states provide for at least one de novo hearing in the judicial branch. Representative Brown tried to determine the cost of posting a bond. Ms. Vogt noted that the taxpayer could pay a bond or provide other evidence of their ability to pay the disputed amount. She stated that the more solvent the taxpayer the easier it is to accommodate the requirements to the Department. She observed that the same provision applies to administrative and judicial proceedings. The actual cost of the bond was not ascertained. Co-Chair Hanley summarized that the Department has the responsibility to assure that bond is met. Discussion ensued regarding the bonding requirements of the legislation. Ms. Vogt summarized that bonding provisions are not onerous. 12 Co-Chair Hanley noted that the State gets paid if the taxpayer defaults. He maintained that the provision is not intended to be punitive. HB 341 was HELD in Committee for further discussion. ADJOURNMENT The meeting adjourned at 3:35 p.m. 13