Legislature(2015 - 2016)BARNES 124
03/31/2016 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB253 | |
| HB286 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 253 | TELECONFERENCED | |
| += | HB 286 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 253-ELCTRNC TAX RETURN;MINING LIC. TAX & FEES
1:35:32 PM
CO-CHAIR TALERICO announced that the first order of business
HOUSE BILL NO. 253, "An Act requiring the electronic filing of a
tax return or report with the Department of Revenue;
establishing a civil penalty for failure to electronically file
a return or report; relating to exemptions from the mining
license tax; relating to the mining license tax rate; relating
to mining license application, renewal, and fees; and providing
for an effective date." [Before the committee was the proposed
committee substitute (CS) for HB 253, Version 29-GH2924\N,
Nauman, 3/17/16, adopted as the working document on 3/28/16.]
CO-CHAIR TALERICO advised that the committee will continue its
consideration of amendments to HB 253, Version N.
1:36:00 PM
REPRESENTATIVE JOSEPHSON moved to adopt Amendment 10, labeled
29-GH2924\N.4, Nauman, 3/29/16, which read:
Page 1, line 2, following "fees;":
Insert "relating to the computation of depletion
for purposes of the mining license tax;"
Page 2, following line 4:
Insert a new bill section to read:
"* Sec. 3. AS 43.65.010(e) is repealed and
reenacted to read:
(e) The allowance for depletion shall be
computed and deducted on the cost depletion basis
under 26 U.S.C. 612 (Internal Revenue Code)."
Renumber the following bill sections accordingly.
Page 2, following line 21:
Insert a new subsection to read:
"(c) The change made by the repeal and
reenactment of AS 43.65.010(e) by sec. 3 of this Act
applies to a tax year beginning on or after the
effective date of sec. 3 of this Act."
Page 2, line 28:
Delete "Section 6"
Insert "Section 7"
Page 2, line 29:
Delete "sec. 7"
Insert "sec. 8"
REPRESENTATIVE HERRON objected for discussion purposes.
1:36:15 PM
REPRESENTATIVE JOSEPHSON explained that one element of Amendment
10 would take the depletion allowance and change it to only
include a cost, not percent depletion. He paraphrased a portion
of the committee's hearing minutes of 2/17/16, page 14, wherein
Mr. Spanos indicated that the amount for percentage depletion
can actually exceed actual costs and called the depletion
allowance its own line item expense. Representative Josephson
then recalled that the committee's substitute for HB 247 stopped
gross value reduction (GVR) and net operating loss from being
combined to create a loss greater than the actual loss. Thus,
one element of the amendment to only include cost depletion, not
percentage depletion. He further recalled the department saying
it is complicated when it has returns where there is that switch
back and forth. Currently, the percentage depletion allowance
allows the producer to reduce gross income by 15 percent for
metal mines and a calculation of net income. Additionally,
mining companies may reduce gross income by actual cost
depletion. While the amendment would dispense with a percentage
depletion, he noted, there would still be cost depletion. Under
this regime it is not hard for companies to inflate expenses,
not deliberately but there is some concern because just as the
state is trying to contain costs as an institution, the
companies are containing and reducing costs. Companies can
inflate expenses or export revenue to report less net income,
using the depletion allowance the cost of these resources is
being expensed at far above the actual costs in some instances.
Although the concept of depletion allowance is consistent with
the mining industry and part of the mining culture, it should be
changed so that there would only be cost depletion and not
percentage depletion, and that is why he offers this amendment.
1:39:34 PM
BRANDON SPANOS, Deputy Director, Tax Division, Department of
Revenue, spoke at Co-Chair Talerico's request. He said there
are two methods of depletion in statute. Current statute reads
that a company must use percentage depletion unless cost
depletion exceeds percentage depletion and then the company must
use cost depletion. So basically the statute is saying that
percentage depletion is the standard for the expense against the
Alaska Mining License Tax, but it allows for the generic cost
depletion method in the case that that is a greater expense for
the company in that year. That mimics the federal depletion
which has similar language, although the reasons are different
for federal purposes; it has to do with selling an asset and the
capital gain recapture - making that part of ordinary income
rather than capital income. The federal statutes read that when
the asset is sold, there must be a calculation for either
allowed or allowable depletion; does not really apply in mining
license tax but the department did adopt similar language for
the depletion calculation.
MR. SPANOS confirmed that under the percentage depletion
calculation an asset can be depleted beyond its cost basis.
When there is a depletion expense the cost basis is reduced, and
under percentage the cost basis is reduced by that expense in
that year. So, over the life of the mine the operator would
eventually deplete the cost to zero. Under the cost depletion
method once the basis reaches zero, expenses against that can no
longer be taken because the asset has been fully depleted.
Under the percentage depletion method, the depletion can
continue to be taken beyond that cost basis or adjusted cost
basis, and the percentage is simply a percentage of the gross
value so that expense is given. There have been discussions as
to why the federal government chose to allow that percentage
depletion beyond the basis, and the best the department can
determine is that it is probably to encourage continued
development and give some sort of recognition that those assets
are of value even though the cost had been fully depleted.
1:42:25 PM
REPRESENTATIVE SEATON posited that switching back and forth
between years gets confusing. The state allows for cost
depletion or depreciation of the full value of the asset and not
beyond the full value of the asset when looking at industries
and personal property. He held that the legislature needs to go
back and advise that people can get depreciation for their
entire asset, but not beyond the entire asset which the
percentage depletion allows. He said he therefore supports the
amendment.
CO-CHAIR TALERICO asked what type of problem this has presented
to the division in administering the tax to date.
MR. SPANOS replied that depletion is a difficult calculation and
he wouldn't say that cost versus percentage makes it more
difficult. The percentage calculation is straight forward,
depending on the records of a company, although if the division
is in an audit situation it can become quite difficult to track
the adjusted basis of the asset. For example, should a company
state that this year its cost expense is greater than its
percentage expense and it wants to use the cost, the division
would then have to calculate the adjusted basis for that year,
which does become quite difficult if there are no records going
back because it may be the first time the division has audited
the company. It can become complicated, but if the division was
to go to just a simple cost depletion method it would probably
need to update some schedules in the tax return in order to have
companies report what that adjusted basis is so it can be
tracked. He supposed the division could do that now and have an
easier method, but most [companies] do take percentage depletion
and the division doesn't usually run into that issue. So, yes,
there are some complications with having both options available
but it's not insurmountable.
1:45:25 PM
REPRESENTATIVE SEATON surmised that if the depletion allows cost
to be reduced below the depreciable cost of the item that means
the state is losing mining license tax. He inquired whether the
division knows how much money the state is losing by allowing
people to depreciate more than the full value of the assets.
MR. SPANOS answered that the division has not performed a
calculation on that. He offered that with the older mines it
could be assumed that they have already fully depleted the basis
of the asset, and it could be assumed that any depletion would
be above and beyond what they would be allowed under cost. A
newer mine may be taking cost in lieu of percentage now.
CO-CHAIR TALERICO presumed there is not currently an analysis of
where the state is actually sitting today.
MR. SPANOS confirmed the division does not presently have an
analysis, although based on the age of the mine the division
could try to analyze it and give a rough estimate.
1:47:07 PM
REPRESENTATIVE JOSEPHSON posited that in some instances it
appears the companies prefer cost depletion and if they prefer
it then it must be to their financial benefit. But at the same
time the companies should not be allowed to take beyond the cost
basis when they are getting depletion and also enjoying other
deductions for purposes of calculating a net profit tax, which
is why he has offered Amendment 10.
1:47:44 PM
REPRESENTATIVE HERRON maintained his objection.
A roll call vote was taken. Representatives Seaton, Josephson,
and Tarr voted in favor of Amendment 10. Representatives
Herron, Chenault, Johnson, Talerico, and Nageak voted against
it. Therefore, Amendment 10 failed to be adopted by a vote of
3-5.
1:48:45 PM
REPRESENTATIVE JOSEPHSON withdrew Amendment 11, labeled 29-
GH2924\N.9, Nauman, 3/29/16.
1:48:56 PM
REPRESENTATIVE JOSEPHSON moved to adopt Amendment 12, labeled
29-GH2924\N.10, Nauman, 3/29/16, which read:
Page 1, line 1, following "Act":
Insert "relating to the limitation on the
exploration incentive credit;"
Page 1, following line 4:
Insert a new bill section to read:
"* Section 1. AS 27.30.050 is amended to read:
Sec. 27.30.050. Limit on application of credit.
An exploration incentive credit for a mining operation
may not exceed $20,000,000 and must be applied within
seven [15] tax years or royalty payment periods after
the taking of the credit is approved under
AS 27.30.020(2), but the tax years or royalty payment
periods in which the credit is applied need not be
(1) the tax year or royalty payment period
in which the person first incurs liability for payment
of tax or royalty based on the person's activity that
is the basis of the claim of the exploration incentive
credit; or
(2) consecutive periods."
Page 1, line 5:
Delete "Section 1"
Insert "Sec. 2"
Renumber the following bill sections accordingly.
Page 2, line 17:
Delete "sec. 1"
Insert "sec. 2"
Page 2, line 18:
Delete "sec. 1"
Insert "sec. 2"
Page 2, line 19:
Delete "sec. 2"
Insert "sec. 3"
Page 2, line 21:
Delete "sec. 2"
Insert "sec. 3"
Page 2, following line 21:
Insert a new subsection to read:
"(c) AS 27.30.050, as amended by sec. 1 of this
Act, applies to a credit accrued on or after the
effective date of sec. 1 of this Act."
Page 2, line 28:
Delete "Section 6"
Insert "Section 7"
Page 2, line 29:
Delete "sec. 7"
Insert "sec. 8"
REPRESENTATIVE HERRON objected for discussion purposes.
1:49:23 PM
REPRESENTATIVE JOSEPHSON explained Amendment 12. He noted that
the law reads that the mining exploration incentive credit can,
essentially, cover 3.5 calendar years. The committee substitute
(CS) reduces that to 3 years. The administration would like to
dispense with the credit altogether, and he made arguments about
the need to do that during periods of production. Amendment 12
would shorten the period in which it could be exercised to 7
years rather than 15 years. It may have the salutary effect of
incentivizing production because it doesn't benefit exploration
and development, it benefits production. The amendment says to
get to production if the company is going to get there, and if
the company doesn't get there the credit would be lost. So, it
is another way of looking at reform of this very long period of
incentive credits which has existed since 1951 and which needs
another consideration.
REPRESENTATIVE HERRON related his understanding that this
amendment was within Amendment 4, which was passed, and the only
difference is that there was a 15 year time limit for an
exploration incentive credit, and the amendment would change it
to 7 years. He asked why 7 years and not 10 or 5 years.
REPRESENTATIVE JOSEPHSON replied that he consulted with the Tax
Division and is trying to strike a middle ground.
1:52:13 PM
REPRESENTATIVE HERRON asked whether someone is available to
speak to the amendment being an incentive and whether it would
be an advantage to miners or a complication for miners.
ED FOGELS, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources (DNR), explained that the once a
company has built up some exploration and incentive credits and
then starts production, the company has up to 15 years to cash
in those credits; Amendment 12 would reduce it to 7 years. The
issue is what the company's tax liability would be in any given
year for those first 7 years and whether the company could use
up all $20 million if it had accumulated the maximum amount. It
is hard to say whether that would be a net positive for the
state's treasury or some kind of a disadvantage to the
individual miner because it would depend upon the particular
project and the project's tax liability year to year.
REPRESENTATIVE HERRON related that he is seeking an answer as to
whether he should vote for this amendment because it benefits
the mining operation or unfairly harms the mining operations.
MR. FOGELS surmised that the longer time period a mining company
has to utilize its credits the more advantageous it would be for
the company.
REPRESENTATIVE HERRON asked whether there is an analysis and
whether it means more money in the treasury. He said he wishes
he knew that answer before making a policy decision.
CO-CHAIR TALERICO responded he is unsure that anyone has the
ability to answer that question. He recalled that DOR Deputy
Commissioner Burnett testified that one of the particular things
in the bill was the exemption which didn't seem to be a hot
ticket item for the administration because there isn't anything
on the immediate horizon that is going to get underway.
MR. FOGELS noted that as far as the 3.5 year exemption, DNR does
not see any mines coming on line in the immediate future that
would be affected by this. That would be down the road far
enough where it is out of the range of the department's fiscal
analysis. So, he said, he thinks that for that particular
provision there would be no immediate fiscal impact to the
return to the state down the road.
CO-CHAIR TALERICO remarked it could be a good topic for the
working group.
1:56:40 PM
REPRESENTATIVE JOSEPHSON held that this is a hot ticket item for
the administration in that the original bill dispensed with the
credit altogether. He therefore surmised the administration's
position is that it does not want this credit.
MR. FOGELS agreed that that provision is in the governor's bill,
and Deputy Commissioner Burnett said it is something the
administration is willing to discuss as the bill moves forward.
REPRESENTATIVE SEATON referred to the statement that right now
nothing is seen on the immediate horizon so the issue could wait
until a later time. He posited that it would be advisable to
have changes the industry is aware of rather than waiting until
a project is about to come online.
MR. FOGELS agreed and clarified he is not advising the committee
to rule on that provision one way or the other, he is just
pointing that if the tax exemption is deleted there won't be any
real immediate benefit to the state's treasury in the near term.
REPRESENTATIVE SEATON stated this should be an issue the working
group contemplates to be certain the legislature has those
decisions in place before a mine is coming close to production.
MR. FOGELS agreed it would be advisable and would be a good
topic for the working group along with all of the other
components in the fiscal picture for a mining operation.
1:59:20 PM
REPRESENTATIVE HERRON noted the administration wanted to remove
this and it is back in, his colleague wants to reduce it from 15
years to 7 years, and the advantage or harm that the reduction
could cause is unknown. He asked Co-Chair Talerico whether this
committee could request an analysis so it is there for the House
Finance Committee to review. Even if the amendment passes, it
would be important for the next committee to understand what it
means. Responding Co-Chair Talerico, he clarified that his
request is for the co-chair's office to send a note along for
the House Finance Committee to seek analysis on this question.
CO-CHAIR TALERICO agreed to do so.
MR. SPANOS clarified that the exploration incentive credit and
the 3.5 year exemption often get confused. The administration
was trying to remove the 3.5 year exemption in the bill.
Therefore, he is unsure whether the administration has a
position on the credit.
2:01:07 PM
REPRESENTATIVE HERRON maintained his objection to Amendment 12.
A roll call vote was taken. Representatives Tarr and Josephson
voted in favor of Amendment 12. Representatives Herron,
Chenault, Johnson, Seaton, Talerico, and Nageak voted against
it. Therefore, Amendment 12 failed to be adopted by a vote of
2-6.
2:02:03 PM
REPRESENTATIVE JOSEPHSON moved to adopt Amendment 13, labeled
29-GN2924\N.11, Nauman, 3/29/16, which read:
Page 1, following line 9:
Insert a new bill section to read:
"* Sec. 2. AS 43.65.010(a), as amended by sec. 1 of
this Act, is amended to read:
(a) A person prosecuting or attempting to
prosecute, or engaging in the business of mining in
the state shall obtain a license from the department.
[ALL NEW MINING OPERATIONS ARE EXEMPT FROM THE TAX
LEVIED BY THIS CHAPTER FOR THREE YEARS AFTER
PRODUCTION BEGINS.]"
Renumber the following bill sections accordingly.
Page 2, following line 14:
Insert a new bill section to read:
"*Sec. 6. AS 27.30.030(b)(2), AS 43.65.010(b), and
43.65.060(4) are repealed."
Page 2, following line 18:
Insert a new subsection to read:
"(b) AS 43.65.010(a), as amended by sec. 2 of
this Act, applies to a mining operation that begins
production on or after the effective date of sec. 2 of
this Act."
Reletter the following subsection accordingly.
Page 2, line 19:
Delete "sec. 2"
Insert "sec. 3"
Page 2, line 21:
Delete "sec. 2"
Insert "sec. 3"
Page 2, line 28:
Delete "Section 6"
Insert "Section 8"
Page 2, following line 28:
Insert a new bill section to read:
"* Sec. 10. Sections 2 and 6 of this Act take
effect January 1, 2020."
Renumber the following bill section accordingly.
Page 2, line 29:
Delete "sec. 7"
Insert "secs. 9 and 10"
CO-CHAIR TALERICO objected for discussion purposes.
2:02:17 PM
REPRESENTATIVE JOSEPHSON explained Amendment 13. He noted the
administration would like to collect taxes in every year and end
what he calls "the tax holiday" for hard rock mines. The
committee has so far rejected that, although the committee
reduced from 3.5 years to 3 year the term of the exemption.
Amendment 13 would remove that exemption in 2020. As heard from
the deputy commissioner, there's probably no one known, and
there are only really six or seven players, who in the near term
are probably in their exempt profile. If there is any concern
about that, they would be captured in this window and would
continue to enjoy the exemption for another 3 years 8 months.
However, as pointed out by Representative Seaton, vested
interests could grow during that span under anticipation that
the tax holiday would be there for them. Those interests would
know now at the outset that it would not be there for them.
Therefore, the amendment is designed to offer some amount of
comfort to both sides, and also put the state in a position
where the maximum benefit is arrived to the people from the
"taxation scheme that we have."
2:04:22 PM
REPRESENTATIVE HERRON asked whether the new bill section,
Section 2, proposed by Amendment 13 is a business license that
shall be obtained.
REPRESENTATIVE JOSEPHSON responded yes, the amendment was
written so that it attaches itself to the mining tax statute,
which is the mining license tax. It uses the language "business
of mining" in the narrative at line 5 of the amendment, but he
thinks this part of the mining license tax. It would repeal the
reprieve from tax effective January 1, 2020.
MR. SPANOS clarified the mining license is in lieu of a business
tax. So, a person only in the business of mining can obtain a
mining license through the Tax Division, and a business license
would be unnecessary.
CO-CHAIR TALERICO surmised that a typical business license is
not required for mining due to the mining license.
MR. SPANOS replied correct. If mining is the only business then
obtaining a business license is not required; if a person is
building roads and mining, a business license would be required.
If just mining, the mining tax license is in lieu of a business
license; the Tax Division administers that and when a person
gets a license the person must then file a tax return.
REPRESENTATIVE SEATON offered that Section 2 refers to a person
obtaining a license, and Section 10 reads that it takes effect
after January 1, 2020. He asked whether page 2, line 13, of the
amendment means that people do not need to get a mining license
until January 1, 2020, because Version N, [page 1, lines 6-7,
states, "(a) a person prosecuting or attempting to prosecute or
engaging in the business of mining in the state shall obtain a
license from the department."
2:08:00 PM
The committee took an at-ease from 2:08 p.m. to 2:14 p.m.
2:14:20 PM
REPRESENTATIVE SEATON said the construction of Amendment 13 is
confusing. He understood that the [amendment] reinserts the
original bill language that the three year tax exemption goes
away, but starting in 2020. He further understood that Section
6 of the amendment would not apply to current mines. It simply
says to stay with the three year exemption until 2020 and then
the tax exemption will go away.
REPRESENTATIVE JOSEPHSON held that Amendment 13 captures a
couple of concerns. One is that in the near term there probably
will not be anyone who would be affected in regard to tax
exemptions. He reminded the committee of testimony on various
bills regarding resource development that it is important not to
pull the rug out and disrupt something and make it less viable.
This amendment allows that if a company is in the early phase of
development, the company knows before making serious investment
that there has been a change in the 65-year-old policy. He
recalled that in HB 247 the committee looked at the
affordability of tax credits. He pointed to a discussion of the
Pebble Mine from Mr. [Brune] of receiving $200 million, which
included all sorts of revenue and not solely the mining license
tax. Amendment 13 would achieve some balance between the
administration's position, which was a more abrupt end, and a
nearly four year extension of the exemption.
2:17:03 PM
REPRESENTATIVE HERRON maintained his objection.
A roll call vote was taken. Representatives Josephson, Tarr,
and Seaton voted in favor Amendment 13. Representatives Herron,
Johnson, Talerico, and Nageak voted against it. Therefore,
Amendment 13 failed to be adopted by a vote of 3-4.
2:18:08 PM
CO-CHAIR TALERICO clarified for the record that Amendment 3,
labeled 29-GH2924\N.8, Shutts/Nauman, 3/29/16, had been adopted
[at the previous hearing]. That amendment established a
legislative working group to study the tax structure for mining.
REPRESENTATIVE JOSEPHSON noted that Amendment 4, labeled 29-
GH2924\N.16, Nauman, 3/30/16, had also been adopted [at the
previous hearing]. That amendment was in regard to deductions
of the credit against royalty.
2:19:02 PM
CO-CHAIR TALERICO opened committee discussion.
REPRESENTATIVE SEATON related his appreciation for the adoption
of a working group because mining taxes are complex and the goal
is to align the industry's needs with the needs of the state and
broad based taxes. He reiterated that the amount of revenue
being generated from all of the different industries, such as
tobacco and alcohol at $40 million and the fishing industry at
$13 million. The committee is discussing many things and the
state does not have as much new revenue to try to balance the
state's books from this industry as the state receives from
other industries. In moving forward, he is hoping the working
group can help the legislature balance between the industry as
well as the broad-based taxes.
REPRESENTATIVE JOSEPHSON offered his appreciation for the
committee taking some of the governor's positions - reducing the
exemption by six months and increasing the mining license tax by
a percentage point. Even though he gained enormously from
visiting the Fort Knox Mine, he related, part of this relates
back to the legislative research Minerals Extraction Report,
which said the resource value, for example in 2009, was just a
hair under $2.5 billion, and the state received as government
revenues a percentage of the $2.5 billion at 2.76 percent. That
appears to be a small number, but obviously the committee has to
remove itself from the oil and gas industry because even though
that is capital intensive, this is really capital intensive and
they are just different animals. He said he is glad the
legislature intends to continue to study this issue.
CO-CHAIR TALERICO said the committee will forward Representative
Herron's request to the bill's next committee of referral.
2:22:32 PM
CO-CHAIR NAGEAK moved to report the proposed committee
substitute for HB 253, Version 29-GH2924\N, Nauman, 3/17/16, as
amended, out of committee with individual recommendations and
the accompanying fiscal notes. There being no objection, CSHB
253(RES) was passed from the House Resources Standing Committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CS HB 253 Amendments Ver. N Packet.PDF |
HRES 3/31/2016 1:00:00 PM |
HB 253 |
| CSHB 253 Version N.pdf |
HRES 3/31/2016 1:00:00 PM |
HB 253 |
| HB 253 Legal Memo.pdf |
HRES 3/31/2016 1:00:00 PM |
HB 253 |
| CS HB 286 Ver E 3 30 2016.pdf |
HRES 3/31/2016 1:00:00 PM |
HB 286 |
| HB0286 Fiscal Note -2-2-012916-DPS-N.PDF |
HRES 3/31/2016 1:00:00 PM |
HB 286 |
| HB0286 Fiscal Note-1-2-012916-DFG-N.PDF |
HRES 3/31/2016 1:00:00 PM |
HB 286 |
| HB286 - Sectional Analysis.pdf |
HRES 3/31/2016 1:00:00 PM |
HB 286 |
| HB286- Fiscal Note F&G-CO-2-2-16.pdf |
HRES 3/31/2016 1:00:00 PM |
HB 286 |
| HB286 Sponsor Statement - Governor's Transmittal Letter.pdf |
HRES 3/31/2016 1:00:00 PM |
HB 286 |
| HB286 ver A.pdf |
HRES 3/31/2016 1:00:00 PM |
HB 286 |