Legislature(2017 - 2018)BARNES 124
04/03/2017 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing(s) | |
| HB126 | |
| HB36 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 14 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 36 | TELECONFERENCED | |
| += | HB 126 | TELECONFERENCED | |
HB 36-TAX: INCOME FROM NON C CORP ENTITIES
3:47:22 PM
CHAIR KITO announced that the final order of business would be
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 36, "An Act bearing the
short title of the 'Fair Contribution by High Profit Businesses
Act'; requiring certain persons in the business of oil and gas
production or transportation to pay income tax; establishing a
tax on the income of a sole proprietorship, partnership, limited
liability company, or an S corporation; relating to exemptions
from the tax on corporations; and providing for an effective
date." [Before the committee was the proposed committee
substitute (CS) for SSHB 36, Version 30-LS0148\E, Nauman,
3/29/17, ("Version E"), which was adopted as the working
document on 4/1/17.]
CHAIR KITO opened public testimony on SSHB 36.
3:47:48 PM
HEIDI HEINRICH, General Manager, Lucky Wish Bone Restaurant,
testified in opposition to SSHB 36. She said she has been with
the Lucky Wish Bone Restaurant for 38 years, most of that time
as the general manager, and she also owns a small coffee shop
that is an active member of the community. She said the
economic atmosphere that the Lucky Wish Bone is experiencing
this year makes her fear SSHB 36 even more. The business is
seeing a reduction in sales of 10-20 percent from the previous
year, she advised, and in speaking with other business owners
and vendors, it is apparent that it is an industry-wide problem.
Alaska is facing a recession.
MS. HEINRICH stated that while titled "The Fair Contributions
for High Profit Business Act", the bill begins with a list of
$25,000 as the first profit margin. A year-end profit of this
amount is hardly a high profit operation, she said. Breaking
those numbers down month to month would mean a profit of $2,083
a month. As a businessperson she can say that overseeing a crew
and maintaining overhead, plus all the other daily stresses,
would certainly not be worth it at the end of the day. The
formula used for SSHB 36 is not accounting for total sales, she
continued, and more it is not accounting for (indisc.) profit.
Despite Representative Gara's assurances, at the end of the day
SSHB 36 is suggesting a legal form of double taxation.
MS. HEINRICH stated that a business like the Lucky Wish Bone
Restaurant would not, at the end of the day, be able to see
income as profit to owners. As a business with a small group of
people, the restaurant pays its employees over minimum wage, has
health benefits available, and shares with its employees the
profit that there is at the end of the year. This last, she
noted, is the only one that is not already mandated in some form
by the government.
MS. HEINRICH pointed out the probability of the minimum wage
being raised to possibly $15 an hour this year, and the cost of
worker's compensation going up. At some point, she said, it
becomes too expensive to continue to maintain a small business
and breaking points will come. She offered her belief that by
this time next year, many businesses currently in operation will
have closed their doors, unable to make the long hours and hard
work pay the bills. And, she continued, this is without adding
another hit to the bottom line with SSHB 36.
MS. HEINRICH maintained that fixing the mess state government
has gotten Alaskans into should not be on the backs of just the
business owners. She suggested that a sales tax could be a
driving force to a better economy and would collect tax from all
Alaskans and visitors alike. She has heard Representative Gara
and others worry about a sales tax hurting low-income families,
but there is the blow that they will take if the businesses
across the state that employ them begin to close. Business
owners are hardworking people, she continued, often working many
longer and harder hours than the people they employ. Business
owners offer and provide employment for their fellow Alaskans
and contribute to the economy. Without business owners Alaska's
economy would be in even worse shape. There are more ways to
deal with Alaska's government deficit than just SSHB 36, she
said.
3:51:42 PM
REPRESENTATIVE WOOL understood Ms. Heinrich as having stated
that the [proposed] minimum profit would be $25,000.
MS. HEINRICH replied that the bill begins with a list of how the
profits would be broken down and $25,000 is considered as being
a high profit business. She stated that $25,000 at the end of
the year is not a high-profit business.
CHAIR KITO pointed out that the aforementioned table is for oil
and gas taxes that are separate from what would be a corporate
tax. He explained that corporate tax begins in Section 4 on
page 3 [of Version E] and would begin at $250,000 subject to a 5
percent tax.
REPRESENTATIVE WOOL confirmed that for a small non-oil and gas
business it would be $250,000, not $25,000.
MS. HEINRICH responded that a business would still be looking at
paying almost a second percentage because the bill looks at
paying 9.4 percent. She calculated that a couple owning a small
business would pay almost $19,000 more under this than two
people would pay separately.
3:53:43 PM
SILVIA VILLAMIDEN, Executive Director, Alaska Hospitality
Retailers, testified in opposition to SSHB 36 as written. She
said she opposes the bill for many reasons, including those
stated by Ms. Heinrich. She opined that the bill, as written,
will hurt communities as far as jobs and the economy, and will
hurt small business owners with yet another expense. She said
her association has over 350 individual units of membership,
which represent over 6,000 employees in the state. Alaska's
economy is hurting and ultimately consumers will begin to feel
the impact of the higher cost of goods. Alaskans and tourists
alike will have few places to dine or shop.
MS. VILLAMIDEN predicted that Alaska's high unemployment would
only get worse. Businesses are already struggling to keep their
doors open, she related, and adding more taxes will become an
economic disaster. Businesses will have to cut down labor by
laying people off and/or by cutting hours, she said, which will
not help Alaska's workforce.
MS. VILLAMIDEN pointed out that merchants have the expense of
freight, a cost that many people forget about. She advised that
freight can run a business's expenses very high and that some
businesses in Anchorage have already closed because they could
no longer afford to pay the freight cost for bringing their
merchandise to Alaska. She further pointed out that worker's
compensation insurance, general and liability insurance, and
health insurance are also extremely high and make it hard for
any business to stay open. The proposed tax of 5 to 9.4 percent
is another increase that could hurt a lot, she said.
MS. VILLAMIDEN urged committee members to take time, listen to
the business owners in their own communities, and do homework to
learn more before considering any more taxes and before any more
businesses are driven out of Alaska.
3:57:12 PM
CAROLINA STACEY, Owner, Kindred Spirits, testified in opposition
to SSHB 36. She said she and her husband own several businesses
and are active members in their community. She expressed her
hope for having a good future in Alaska for herself and her two
children. She stated she is wary about SSHB 36 and noted
Alaska's current economic atmosphere is not optimal. Her
businesses are seeing a big reduction in sales, up to 20 percent
from last year, she related. Her vendors and other businesses
have also been concerned because they too are seeing reduced
sales. Alaska is experiencing an economic downturn, she said.
MS. STACEY said SSHB 36 would affect every business making over
$200,000 in profits per year and has major flaws. Called "The
Fair Contributions for High Profit Business Act", the bill would
automatically consider any business with profits over $200,000
to be a highly profitable business, regardless of its annual
sales. The bill groups all businesses together under one
criterion regardless of size, number of employees, or industry,
she continued. The bill is aiming to tax only individuals that
are business owners instead of taxing all citizens, basically
creating a legal form of double taxation. All individuals need
to be invested in their communities, she stated, not just
business owners.
MS. STACEY said she listened to the presentation that explained
the bill. The presentation used businesses making $10 million
as examples and said that businesses needed to contribute to the
community and the state. However, she pointed out, the reality
is that all businesses are being grouped as highly profitable if
they earn $200,000, whether they are lawyers, doctors, a small
coffee shop, or a grocery store. Small businesses are not the
same as large ones, she said. Comparing a mom-and-pop shop to
big corporations like Coca-Cola and Wal-Mart is unfair.
MS. STACEY explained how SSHB 36 would affect her small
business. As a hands-on owner, she said, her hours are 24 hours
a day, 7 days a week ("24/7"). When somebody calls in, she
covers shifts even if she already worked hers. Plus, she must
do ordering and shopping and must keep her business running no
matter what. She must manage her personnel and do scheduling
and hiring. If something breaks, she must fix it no matter how
inconvenient or costly. These are the responsibilities of being
an owner, she continued, but they are also the joys of being her
own boss.
MS. STACEY said she pays most of her employees more than she
pays herself. Her employees receive a guaranteed paycheck, they
get paid before she does, and they get paid more than she does.
This is because her income is tied to her business profitability
regardless of how many hours she works, she explained.
Sometimes she must work 60-80 hours to accomplish everything and
keep her business running, but her employees do not, they get to
go home. Grouping her small business with businesses that are
earning $10 million in profits is unfair and cannot be done, she
argued. At the end of the day when her shop has profits it is
the sum of her family's hard labor to make their business as
profitable as possible. She said SSHB 36 is asking small
business owners to pay themselves less at the end of the year.
4:01:36 PM
MS. STACY added that SSHB 36 is suggesting a legal form of
double taxation. She stated that small businesses like hers
will end up paying taxes on their profits and then the business
owners will also have to pay taxes again on that income as the
profits flow to owners. The income transfer from businesses to
owners is not exempt from taxes again, she pointed out. Page 3,
line 23, [of Version E] clearly says that business owners will
be able to deduct paid taxes from their personal income tax, and
not apply payment to their tax bill. "In other words," she
continued, "we will be taxed at a higher bracket based on the
fact that we choose to work for ourselves versus working for
someone else."
MS. STACEY asked why only business owners are being taxed and
not every citizen. Businesses are being singled out, she said,
rather than asking everybody to invest in their communities. A
sales tax would make everyone take a bite of the pie, not just
business owners. Business owners are hardworking people who are
offering and providing employment to communities and are the
driving force that promotes a healthy economic environment in
Alaska, she continued. A friendly environment must be provided
if businesses are to grow and flourish in Alaska. She urged
committee members to realize that all the governmental
regulations coming out are creating a hostile environment for
doing business. She further urged members to take her concerns
to heart and re-evaluate SSHB 36 because it will not work for
people like her.
4:03:30 PM
REPRESENTATIVE BIRCH stated he shares Ms. Stacy's concerns. He
said [Version E] has two components as he interprets it.
Section 2 applies to persons engaged in oil or gas production
and that tax would top out at 9.4 percent [on taxable income of
$222,000 or more]. [Section 4] applies to business income and
would have a zero percent tax rate on taxable income of less
than $200,000 and a top rate of 9.4 percent on net income of $1
million or more. He offered his understanding that taxable
income is the gross less all expenses. He inquired whether this
is Ms. Stacy's interpretation of the bill as well.
MS. STACY replied yes. She related that [a neighboring couple]
works jobs and does not work nearly as many hours as she does.
If these neighbors make $220,000 in salaries, their taxable
amount is going to be less than hers because she is a business
owner. If she and her husband make more than $220,000, they
will be taxed first on their business and then on their income,
which is not fair. Her neighbors use the roads and school
district just as she and her husband do, she pointed out, but
because she chooses to run a business and employ people and
provide a service to her community, she is going to have to pay
more than will her neighbors.
4:05:45 PM
LORI BREWER, Owner, Caff? D'arte Alaska, testified in opposition
to SSHB 36. She stated that she and her husband have owned
their business for over 25 years and currently employ 56 people.
Like most small business owners, she noted, they have had many
months where they work 10-12 hours a day, 6-7 days a week. They
are on call 24 hours a day, 365 days a year. They started their
business in a small shack in the Mountain View area in 1992.
Owning a small business gives opportunity for people who work
hard to accomplish big goals with little money or little
education, and over time they can accomplish a lot. She said
her company has helped to open hundreds of businesses in the
community and works side-by-side with small business owners as
they start from scratch. Her company employs students, parents
returning to the job force, and second-chance employees who are
transitioning from incarceration to become contributing members
of society.
MS. BREWER said her biggest opposition to SSHB 36 is that it
would double tax small business owners. The way the bill is
written, if she and her husband were partners and together, they
make $222,000 they would pay a business income tax of almost
$21,000. After that is deducted, she and her husband would pay
an additional $19,000 on over $200,000. It would be a double
tax, she stated, because it is a deduction from their income,
not applied to their taxes. She further noted that her
neighbors aren't being taxed like that.
MS. BREWER recalled that in previous testimony, her small
business was compared to Coca-Cola, not to just regular people
working in Alaska. She further recalled it being said that her
small business is a drain on the economy. She pointed out that
her company employs many people and pays more in payroll taxes
than she and her husband pay themselves in income. She and her
husband pay property taxes, pay for permits, and pay taxes on
everything they purchase. She and her husband support and are
involved in their community, she continued, and give to many
non-profits, such as the downtown soup kitchen, the March of
Dimes, and the Fur Rendezvous, to name a few in just the last
couple of months.
MS. BREWER added that the $222,000 is quite often the total
income of a partnership of three or four people in the business.
She emphasized that the economy is tough right now and sales
have decreased in retail and the food industry. In the last few
weeks, she related, three coffee shops have come to her wanting
to put their shops up for sale, and one has actually closed its
doors. As a wholesaler she sees 20-40 coffee shop owners each
week and many are very nervous about what is going on in the
economy and are talking about putting up their houses for sale.
MS. BREWER said SSHB 36 would take away the motivation for being
a small business [owner] in Alaska. She urged that the
legislature help businesses build a climate of growth and
reinvestment in the state, rather than plans for downsizing.
4:10:17 PM
MATTHEW GARDNER, Senior Fellow, Institute on Taxation and
Economic Policy, reiterated some of the points he made in his
invited testimony on SSHB 36 on 4/1/17. Fairness is certainly a
concern here, he said. From a multi-state perspective, the main
inequity seen in looking at Alaska's current treatment of
business income is that Alaska has a corporate tax with marginal
rates up to 9.4 percent on traditional C corporations and a tax
rate of zero on businesses that choose to incorporate in other
ways. The main concern, he continued, is that that can create
harmful incentives for businesses to shift their form of entity
away from C corporations and toward these alternative forms.
MR. GARDNER recalled that several witnesses asked the question,
Why tax business income on the person's side and not tax other
forms of personal income? He noted that 42 states and the
District of Columbia currently levy a broad-based personal
income tax on all forms of income and advised that it is worth
considering whether that might be a more equitable way of going
forward. From a business tax perspective, he added, SSHB 36
takes an important step towards remedying a pretty clear
inequity in how different types of businesses are created in
Alaska.
4:12:03 PM
REPRESENTATIVE WOOL addressed Mr. Gardner's statement that if a
company was a C corporation it may want to re-define itself as
another kind of corporation to avoid the taxes. But, he said,
that is the current situation and has been going on for a while,
so someone would have done it already.
MR. GARDNER replied yes, there is some anecdotal evidence that
that's been going on for a while. He recalled that 20 years ago
a former Department of Revenue deputy commissioner said, in
effect, that a new business would be nuts not to form as a pass-
through. Equalizing the tax treatment or taking a step towards
equalizing the tax treatment of C corporations and pass-through
businesses could take away that incentive and make it so that
choice of entity would be based on purely economic
considerations what the market tells people to do - rather
than what the tax system tells people to do. So, he continued,
SSHB 36 is about trying to level the playing field going
forward. He agreed with Representative Wool that the choices
companies have made so far have probably in some cases been
contingent on this tax differential for decades. The sensible
role, he advised, is to try to mitigate that to reduce, not
eliminate, that gap going forward.
4:13:34 PM
REPRESENTATIVE WOOL asked what Mr. Gardner would say to the mom-
and-pop businesses who just testified that they are simply
regular people doing their jobs who happen to have a small
business that is categorized as, say, an S corporation, while
their neighbors who are employees of a company and making the
same amount of money would not have to pay the extra tax that
the people who are small business owners would have to pay
[under SSHB 36]. These small businesses are not Coca-Cola or
Exxon, he continued, and they are asking why they would have to
pay this tax while other people would not.
MR. GARDNER responded that that is an excellent question from
the testifiers. He said the first point he would make is that
the net income threshold of $250,000 for paying any tax at all
for non-oil and gas businesses would go a long way to making a
clear distinction between the Coca-Colas and the mom-and-pop
businesses. The $250,000 of net income, which is income after
all expenses, is the point at which tax would start to be paid.
A net income of $300,000, for example, would pay a tax of $2,500
for an effective tax rate on that net income of 0.8 percent. A
net income of $500,000 would pay a tax rate of 2.5 percent. He
said that makes a clear distinction, and from a multi-state
perspective a bigger distinction, between more profitable
businesses and less profitable businesses than exists in almost
any other state with income taxes. Most states apply tax rates
at a much lower level than $250,000. So, he continued, there is
an effort, more so than in most states, to try to distinguish
between Exxon and Coca-Cola and the truly small business.
MR. GARDNER said the second point he would make is that the
testifiers are correct that there is an inequity when taxing
some forms of personal income but not others. The most sensible
long-term approach to taxing personal income, he advised, is to
tax all types of income the same way. Alaska had a personal
income tax and repealed it 30 years ago. The more comprehensive
and sensible approach in the long run would be to apply a
universal tax on personal income. In the short run, he
continued, there is an inequity between different types of
business incomes, and [SSHB 36] would try to level the playing
field a bit between those different business forms. It is a
good first step towards a more across-the-board level playing
field for income taxation.
4:16:52 PM
REPRESENTATIVE KNOPP, in regard to making it a level playing
field, observed that Section 2 provides graduated tax brackets.
He questioned how that is equitable in that it seems the harder
someone works, the more the person makes, and so the more the
person pays. He asked why the scale is graduated in Section 2
rather than being a flat 5 or 10 percent.
REPRESENTATIVE LES GARA, Alaska State Legislature, sponsor of
SSHB 36, answered that it was a policy choice. A flat 5 percent
tax could have been chosen, he said, but that would probably
have been higher for most businesses than what is proposed in
the bill, which is that the first $200,000 of any profits is
exempt from any tax whatsoever. It is a [policy] call for
legislators as to whether that is the right amount. He
explained the bill tries to recognize that the lower the profit,
the less tax should be paid. Alaska's current corporate tax
rate of 9.4 percent kicks in at $222,000. The bill does not
reach 9.4 percent until $1 million [in profit]. The bill tries
to make the tax much fairer to smaller businesses by not having
any tax for profit below $200,000 and it provides for a lower
tax than the current corporate tax. Those are legitimate policy
calls for members of the legislature, he reiterated.
4:19:02 PM
CHAIR KITO noted the talk has been about "net profits" but the
bill talks about "taxable income." He inquired whether these
two terms are different or the same thing.
MR. GARDNER replied that, in general from this perspective, "net
income" and "taxable profits" are basically equivalent terms.
They are just different ways of describing the same concept,
which is that all the expenses incurred during the year are
subtracted from all the revenues that are received from sales
and service during the year. In this bill, that income after
expenses is called taxable income, but a net profit is basically
the same concept.
4:20:11 PM
REPRESENTATIVE WOOL drew attention to language [on page 1, line
12, through page 2, line 2, of Section 2, which read:
(e) There is imposed for each taxable year upon the
entire taxable income of every corporation or person engaged in
the production of oil or gas from a lease or property in this
state or engaged in the transportation of oil or gas by pipeline
in the state derived from sources within the state a tax
computed as follows:"
REPRESENTATIVE WOOL further observed [that the tax rate would be
zero percent for taxable income of less than $25,000] and
remarked that $25,000 is a low number. He inquired whether this
is a certain aspect of the oil and gas industry that he is
unfamiliar with, given that $25,000 profit in the industry seems
small.
REPRESENTATIVE GARA responded that the lower tax rate is applied
to all non-C corporations. Except, he pointed out, Alaska has a
separate and complex definition of income for oil and gas and
pipeline companies. Under this definition, called worldwide
accounting, a company's barrels from around the world are
divided by the barrels from Alaska, so what oil and gas
companies pay is not truly Alaska income. This schedule is the
exact same schedule paid by every oil and gas company that pays
a corporate tax, he said. It is the exact one that Exxon pays,
that BP pays, that every C corporation that produces oil and gas
taxes pays. Under the bill, he continued, an oil and gas
company that files as an S corporation would use the same tax
schedule as an oil company that files as a C corporation they
are both doing the same exact activity. The bill uses the same
definition as is used under the existing corporate tax, so it is
profits and profits as defined by the oil and gas corporate tax.
REPRESENTATIVE WOOL asked why the sponsor chose to exempt Native
corporations that are not C corporations. He recalled the
sponsor stating that most Native corporations are C corporations
and that if they are C corporations the bill would not apply.
REPRESENTATIVE GARA answered that according to information from
the Department of Commerce, Community, and Economic Development
(DCCED), all Native and village corporations currently are
covered by the C corporation tax due to the number of
shareholders they have. However, he explained, in case there
are some that are treated differently, he didn't want to enter
into the issue of the Alaska Native Claims Settlement Act
(ANCSA) and so wanted to leave all ANCSA corporations the way
they currently are. If there are any that aren't covered
because they don't have enough shareholders, he added, they
probably don't have the income that would have them pay any tax
under this bill anyway.
4:24:13 PM
REPRESENTATIVE BIRCH inquired whether fishermen are included in
the bill.
REPRESENTATIVE GARA responded that SSHB 36 uses the same rule
that is used under the corporate tax, so a fisher or fishing
company, such as a processor, that pays a fishing tax would get
to deduct that from the corporate tax. He explained that any
company that paid the fishing tax would get to deduct those
payments from its income under the [proposed] new tax if the
company is an S corporation or a limited liability company
(LLC). So, they are treated the same as C corporations - C
corporations that pay a fishing tax get to deduct their tax
payment from their income before they pay the corporate tax.
REPRESENTATIVE BIRCH noted there are two sponsor statements.
One states that SSHB 36 would hit 9,000 S corporations and the
other states 6,000 S corporations as well as other business
types. He asked which number is correct.
REPRESENTATIVE GARA replied that there are 9,000 S corporations
that DCCED knows about in the state. However, it is unknown
whether they would be touched by this tax because $200,000 in
profit must be made before this tax would kick in, and a company
making under $200,000 would not pay any tax. So, 9,000 would
not be hit by this tax, but the portion of them that make
profits over $200,000 would be taxed.
REPRESENTATIVE BIRCH again noted that one of the two sponsor
statements says an estimated 6,000 S corporations and the other
says 9,000.
LAURA CHARTIER, Staff, Representative Les Gara, Alaska State
Legislature, answered that the bigger number of 9,000 is the
correct number and reflects better information. The sponsor
received an updated number from the Department of Revenue (DOR)
and that number is reflected in the updated sponsor statement.
REPRESENTATIVE BIRCH observed the fiscal note states there will
be a collection cost of $2.8 million. He inquired as to whether
there is an estimate on how much revenue would be generated from
the 9,000 S corporations, LLCs, partnerships, and other
profitable businesses under the bill's definition.
REPRESENTATIVE GARA advised that [Ken Alper, Director, Tax
Division, Department of Revenue,] would be the best person to
answer this question. He relayed that Director Alper told him
the state doesn't know what any of these 9,000 S corporations,
LLCs, or 40,000 other businesses earn because none of them are
required to file a tax return. However, he continued, Director
Alper's very rough estimate is $50 million. This estimate is
based on what is known about what fishing and mining companies
make and on what Hilcorp, an oil and gas producer, makes as an S
corporation.
REPRESENTATIVE BIRCH asked whether the administration supports
this proposal.
REPRESENTATIVE GARA replied he has not asked the administration
if it supports this exact proposal. He said he knows the
administration has discussed possibly doing a corporate tax and
when the administration saw that a corporate tax bill was filed
it may or may not have impacted whether the administration filed
one. He added that he is unable to say whether the
administration was going to file in any case.
4:28:42 PM
CHAIR KITO observed Section 2 of Version E states the "person"
engaged in the production of oil and gas. He posed a scenario
in which Company A has 20 shareholders and each shareholder is a
person; the company is not a person. He recalled the sponsor
stating that the tax would be on the overall company and said he
therefore doesn't understand whether the bill is considering a
company to be a person. He asked whether those individual
persons each 20 would have to engage for the company if the
company made more than $250,000 in profit.
REPRESENTATIVE GARA responded that the statutes define "person"
to mean person, business, or corporation. He said a statutory
definition of "person" is at the beginning of Alaska's statutory
code and it includes a corporation. The way the bill is
written, the tax would go on the entity so that 500 shareholders
would not each have to do their own separate tax return only
the business would do the tax return and would apportion to the
shareholders so that they would know their portion.
4:30:10 PM
CHAIR KITO offered his understanding that a "person" could be
defined as a corporation as well as an individual. He asked
whether there is something in the bill that designates for the
oil and gas tax where person is identified that those don't
imply to individual shareholders.
REPRESENTATIVE GARA answered that Section 4 puts the tax on a
qualified entity. He drew attention to page 3, line 8, of
Version E, which states, "For each calendar year, a qualified
entity shall pay a tax". He explained that "qualified entity"
is defined as the various business forms that are defined in the
bill, which is anything from a non-corporate business up to an S
corporation; the whole class of 49,000 businesses that DCCED
lists.
4:31:07 PM
CHAIR KITO clarified the definition explains the qualified
entity for tax on $200,000 and above. However, he said, he was
referring to Section 2 which talks about tax on an oil and gas
pipeline or oil and gas entity and provides a tax schedule.
Section 2 only mentions person and doesn't mention qualified
entity.
REPRESENTATIVE GARA replied that, according to Legislative Legal
Services, the language in Section 2 is the same language that is
used in the current oil and gas corporate tax. The tax goes on
the business. He offered his belief that "person" is used in
the existing oil and gas corporate tax and that "person" means
business. He suggested this question be asked of the bill's
drafter at the bill's next hearing.
CHAIR KITO said he would like to have this question answered
given there is a distinct difference between Section 2 and
Section 4.
4:32:19 PM
CHAIR KITO recalled the earlier public comment about there being
no distinction between a company with gross earnings of $500,000
and profits of $200,000 and a company with gross earnings of $1
million and a profit of $200,000 they are two different types
of companies, yet they would be taxed the same. He inquired
whether the type of company activity was considered when
identifying the amount of profit for taxes.
REPRESENTATIVE GARA responded that whether a company has high
overhead with a gross income of $1 million and a profit of
$200,000 or low overhead with a gross income of $300,000 and a
profit of $200,000 the company's profit is its profit. He
said he didn't want to go to the point of taxing a company's
gross income because gross income has no relevance to actual
profits. He agreed the testifiers are right that both companies
would pay the same tax if they have the same amount of profit.
The bill, he explained, follows the current corporate tax rule,
the C corporation tax rule, which is that no matter how much a
company's gross income it is the profit that matters.
CHAIR KITO said he is trying to imagine the way corporations
might be set up. For example, a larger corporation with higher
gross [income] and higher expenses might have a larger number of
shareholders, which means that that $200,000 would be spread out
among individuals so that each individual is not making much.
He recalled an earlier comment about a limitation on the number
of shareholders for eligibility or requirements to become a C
corporation. He asked how many shareholders or partners there
could be in a partnership before it would be required to file as
a C corporation regardless.
REPRESENTATIVE GARA answered that two individuals setting up a
very small business could decide to become a C corporation on
their own, but right now they wouldn't because they would be
subject to the C corporation tax. He said he used to think that
to be a C corporation, a company had to be publicly traded;
however, he offered his belief that someone could set up a C
corporation with one shareholder.
CHAIR KITO clarified that that was not the question he was
asking. He said he understands that a C corporation can have a
single shareholder. Rather, he said, he is asking what the
limit is before a company must file as a C corporation. For
example, whether a company with 20 shareholders would have to be
a C corporation, or whether a company with 100 shareholders
would have to be a C corporation, or whether an S corporation
could have 1,000 shareholders.
REPRESENTATIVE GARA replied there is a limitation, a certain
number of shareholders where a company would have to file as a C
corporation. He offered his belief that this is why Alaska
Native corporations file as C corporations. It is permissive
for anybody to file as a C corporation, he continued, but at a
certain number of shareholders it must be a C corporation
although he doesn't know what that number is.
MS. CHARTIER stated her belief that 100 shareholders is the
cutoff point between S corporation and C corporation. She
suggested the bill's drafter, Emily Nauman, be asked to provide
a definite answer at a future hearing.
CHAIR KITO calculated that if $200,000 [in profit] were divided
between 100 shareholders each shareholder would receive $2,000
that would be subject to tax.
4:37:28 PM
REPRESENTATIVE WOOL suggested that maybe the origin of the
$25,000 increments in Section 2 is because the net profit for a
corporation is divided among the shareholders, given that the
language says "person" and the increments go up every $25,000,
which seems small for an oil and gas company.
REPRESENTATIVE GARA responded that the $25,000 for the current
corporate tax for C corporations is for the business itself.
Under current law, he continued, if a corporation had 1,000
shareholders and only $25,000 of profits, no individual
shareholder would get much of a share and would not pay much of
a tax. He said he is confident that even though the language
states "person" the $25,000 is for the business and that is why
it is a much lower tax.
4:38:23 PM
CHAIR KITO announced that SSHB 36 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB036 Supporting Documents-Letters of Opposition 4.3.17.pdf |
HL&C 4/3/2017 3:15:00 PM |
HB 36 |
| HB036 Supporting Documents-Letters of Support 4.3.17.pdf |
HL&C 4/3/2017 3:15:00 PM |
HB 36 |
| HB036 Supporting Documents-Federal Tax Brackets 2016 4.1.17.pdf |
HL&C 4/3/2017 3:15:00 PM |
HB 36 |
| HB036 Supporting Documents-ITEP Written Testimony 4.1.17.pdf |
HL&C 4/3/2017 3:15:00 PM |
HB 36 |
| HB036 Supporting Documents Index 4.3.17.pdf |
HL&C 4/3/2017 3:15:00 PM |
HB 36 |