Legislature(2005 - 2006)BUTROVICH 205
04/15/2005 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB164 | |
| HB19 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 19 | TELECONFERENCED | |
| *+ | SB 164 | TELECONFERENCED | |
SB 164-SALMON PRODUCT DEVELOPMENT TAX CREDIT
CHAIR THOMAS WAGONER announced SB 164 to be up for
consideration.
TIM BARRY, staff to Senator Stedman, read the sponsor statement.
SB 164 extends the deadline for salmon processors in Alaska to
receive a salmon product development tax credit. Under the
state's current law, processors can claim the credit only for
property first placed into service by the end of this calendar
year. This bill would give processors three additional years,
until December 31, 2008, to claim the credit.
This legislation also clarifies what types of items are eligible
for the tax credit to more effectively achieve the legislature's
goal of encouraging Alaska seafood processors to develop
innovative value-added salmon products.
He recalled that the legislature passed legislation allowing
processors to claim a tax credit on new equipment they purchased
to add value to salmon-using innovative processing techniques.
The bill, HB 90, that became this law had been proposed by the
Joint Legislative Salmon Industry Task Force and was part of an
effort by Alaska's elected leaders and the fishing industry to
create incentives for the industry to take investment risks and
produce new salmon products and it has worked. This legislation
was drafted in consultation with the Tax Division of the
Department of Revenue.
3:40:45 PM
SENATOR BERT STEDMAN, sponsor of SB 164, said the intent came
from the Joint Legislative Salmon Industry Task Force and was
intended to move industry away from the canned market and into
other value-added markets.
3:41:45 PM
SENATOR BEN STEVENS joined the committee.
3:42:16 PM
SENATOR STEDMAN explained:
Again, we're trying to stimulate the industry for jobs
and value creation.... It takes a while for the
industry to respond and the tax credit being 50
percent to go against their fisheries tax - sometimes
they may have a carry forward and the carry-forward
will last up to three years.
3:43:55 PM
CHAIR WAGONER asked if insulated fish totes and ice machines
were covered under the exemption.
SENATOR STEDMAN said he thought those were excluded.
3:44:40 PM
SENATOR RALPH SEEKINS asked how much the tax credits amount to
each year.
SENATOR STEDMAN replied that credits totaled $1.5 million in
each of the three years 2006 through 2008.
3:46:12 PM
SENATOR GUESS asked when the task force first made this
recommendation, was it their intent to revisit the issue in
three-year extensions or was it just a one-time shot.
SENATOR STEDMAN replied that he didn't recall.
3:47:52 PM
SENATOR BEN STEVENS said recalled that the task force wanted to
give the industry a period of time to make the decision to
invest and wanted to give them an extended period of time to
recoup the credit. It also did not want the credit to be open-
ended and wanted to reassess it.
3:50:16 PM
SENATOR SEEKINS asked which fisheries were benefiting from the
credit.
CHUCK HARLAMERT, Tax Division, Department of Revenue, said that
this credit is limited to salmon processing.
3:51:57 PM
SENATOR STEDMAN said he thought it would be more concentrated in
places where fish are delivered.
3:52:50 PM
CHAIR WAGONER asked if there is a pre-approval process.
MR. HARLAMERT replied that there is no pre-approval process.
Processors file a claim form for this credit with their tax
returns.
Part of the reason for the additional language in the
bill is because of a lack of a pre-approval process
and a 50 percent credit rate. Some taxpayers can
easily read the statute too optimistically - perhaps a
little too broadly... particularly if they have
borrowed heavily to invest. Unknowingly, they may be
accruing 11 percent interest.
He said the new element discussed by the Salmon Task Force was
the exclusion of canneries, but the remainder of this bill adds
clarifications to try to prevent the process of folks claiming
and not paying their tax and ending up with liabilities they
weren't aware of.
CHAIR WAGONER said he would feel much more comfortable with pre-
approval for the credit and asked if the department had a list
of what is approvable.
MR. HARLAMERT replied that this statute doesn't have a list of
qualifying equipment, but requires it to be processing equipment
as opposed to supporting equipment for transportation or
storage. It also requires that the predominant product of that
equipment be a value-added salmon product. He said the more
sophisticated taxpayers have called the department to validate
whether their plans fell within the credit or not and, "Any
taxpayer is welcome to do that."
3:57:00 PM
SENATOR ELTON asked if the net effect of the immediate effective
date would be an immediate limitation to the kinds of equipment
that could be used for the tax credit.
MR. HARLAMERT replied no. The additional language basically
fleshes out and makes clearer what is meant. There is one new
condition in the clarifying language - it prohibits a credit for
canning equipment.
3:58:56 PM
DUNCAN FIELDS, Vice President, Kodiak Salmon Packers, liked the
tax credit, but thought it needs to include onshore ice
machines. He explained that his is a single-plant salmon
processor and it is struggling to survive through the downturn
in the salmon industry. He was able to take advantage of the tax
credit and appreciated the legislature's support of the industry
that is trying to rapidly move toward the value-added processes.
As a small processor, he has to take smaller steps than the
larger folks in the industry.
MR. FIELDS related that last year he borrowed a fillet line to
see how it would work before actually investing in one and the
first thing he realized is that it takes a huge amount of ice to
move the fillets, because the salmon has to relax for 24 to 48
hours before running it through the line.
You have a whole series of totes and all the ice. I
would say it takes probably twice as much ice to run
fish through the filleter. So, ice machines, ice
equipment, it seems would be an important component to
encouraging the industry, particularly the processors
like us to move forward towards value-added. Perhaps
it's included in the language - again I would defer to
help from the Department of Revenue, but I would think
something in that top line on page 2 on processing,
packaging, cooling or product finishing function would
make it explicit and give me a little higher comfort
level.
4:01:39 PM
He supported the idea of not supporting old technology, but was
concerned about losing opportunities if new technology like pop-
tops and can-type containers were excluded as traditional
processing equipment.
STEPHANIE MADSEN, Vice President, Pacific Seafood Processors
Association, said she represents salmon and whitefish processors
from around the state and supported SB 164. She related how the
credit is working for her members saying one member invested
about $500,000 this year, which represents about two new fillet
lines and two other members have fully utilized their 50 percent
tax credit.
I believe that's a demonstration that the program is
working. So, we would appreciate the extension. I
think one of the reasons that the request for the
extension is because it was difficult for the
processors to get up to speed and to get those
investments immediately....
4:06:06 PM
She recommended not completely eliminating canned salmon
products from being available for the tax credit. While she
understands their not wanting to replace the current equipment,
canned salmon would always have role in many of the fisheries
and there is a strong canned salmon market for sockeye and pink
salmon.
It depends on the volume and when the timing of that
run comes. That will kind of move you toward the
importance of canned. We do support examination or
possibility of use for these tax credits to move us
towards value-added canned salmon and that is the pop-
top.... Exactly what does that mean? Well, you have to
get a new seamer, because it's a different top. And,
as you know, the canned salmon and the seaming is very
critical.... There would probably have to be
modifications to the tracking line that sends the tops
down to the main machine as well as modification to
the retort system. Because of the different top,
you're going to have to insure that that retort system
is compatible with the new can. So, that's the need
for equipment as far as the use for pop-tops....
One other thought for consideration is the exclusion
of used equipment. Certainly we don't want shenanigans
as far as one company selling used equipment to
another, but in the food business there are many
opportunities to bring used equipment to the state
that are used either by other food industries or by
other non-salmon producers. For example, the fillet
machines that are used in salmon are also the same
Baader machines that are used in the whitefish
industry. So, there is a possibility that getting used
equipment will not only save the processor money, but
it will save the state some money from the tax credit
perspective. If you pay less for that equipment, your
tax credit is going to be limited or less, but the
benefit is the same.
4:08:53 PM
SENATOR STEDMAN said those two suggestion were explored with the
Department of Revenue, but it was decided that the intent is to
help the industry move beyond cans and used equipment and he did
not think they were stimulating the status quo by doing that.
If a company wants to stay there, that's okay.
MS. MADSEN reiterated and emphasized that canned salmon is
becoming more consumer-friendly and is used globally and
clarified that used equipment would be used for value-added
business, not recycling.
4:12:12 PM
CHAIR WAGONER said the issue is that a business will lease a new
machine and bring it to Alaska. If they like it, they might
negotiate a purchase and he asked if that type of transaction
would be disallowed under this legislation.
MR. HARLAMERT replied that technically it would be considered a
used product and would not be able to be purchased under this
statute. He suggested that the business could negotiate a lease-
purchase contract and then back out of it as opposed to just
leasing it first.
SENATOR SEEKINS agreed with Ms. Madsen that used equipment has
its place with value-added businesses and asked if there was a
mechanism to transfer credits to a downstream purchaser of
equipment.
MR. HARLAMERT replied no.
SENATOR SEEKINS said that would make it difficult for him to
take the risk and therefore he thought it would be
counterproductive to their goal saying:
If there was a perfectly useable system or piece of
equipment in the state that could bring some other
processor toward the goal that you're trying to get to
that you would preclude it from being allowed in the
program.
He said that a lease purchase agreement is just a conditional
sales agreement. Very few of them give someone the option to be
able to determine later on whether or not they want to buy it
and then for tax purposes call it a lease at the beginning and
later on turn it in to a straight line depreciation.
MR. HARLAMERT responded that it was not his place to elaborate
on legislative intent here. He clarified that the federal tax
credit was at no time allowed for used property. He explained:
It is a fact with credits especially when you get in
the range of 50 percent that they are highly subject
to abuse. And, normally, if you have a credit, you're
trying to stimulate something that does not have its
own economic justification. You're trying to tip the
scales to establish that economic justification, but
recognizing that in doing that the economic
justification of doing something else is always there.
If the credit is written too loosely to allow the
taxpayer to get the same credit for something just a
little off your target, that's what's going to happen.
And so, it's generally a good idea to err on the side
of caution with credits and be more narrow than you'd
like to be if you want to be the most effective in
achieving your goal. That's just a general
observation.
SENATOR SEEKINS still thought the credit was too restrictive and
he thought it was an impediment to the goal of the bill.
4:19:01 PM
CHAIR WAGONER gave him an example of a guy who paid over $80,000
for a pinball machine that wound up not working and another guy
who bought a reconditioned one that worked three times better
than the one that was brand new. "That's why I brought this up
in the first place for discussion. These are some of the things
you run into in processing equipment.
4:19:41 PM
SENATOR STEDMAN clarified if a person purchases a piece of
equipment that does qualify, you don't have to file for the tax
credit if you don't want to. He would entertain discussion about
pop-tops, although he didn't want to stimulate the canned
market.
SENATOR ELTON said it was something to think about, but he also
didn't want to give tax credits to produce the same old product
packaged in the same old way. Maybe the canned issue could be
dealt with by using a term of art saying this tax credit is not
available for the same old same old.
4:23:08 PM
KRIS NORRIS, Government Affairs, Icicle Seafoods, supported SB
164. She said Icicle Seafoods purchases and processes a wide
variety of seafood throughout Alaska. She explained that in 2003
Icicle used the salmon product development tax credit to
purchase equipment to make new products with salmon roe (Ikura)
- that prevented oxidation and bacterial growth from happening
prolonging shelf life. In 2004, it used the salmon utilization
tax credit to install new equipment that was more
technologically advanced in their salmon meal plant in Seward.
As a direct result of that upgrade, Icicle has been able to run
a lot more pounds of salmon through their facility and with few
exceptions can utilize 100 percent of an entire salmon including
the guts.
Icicle Seafoods made saleable products from salmon parts that
normally would have been part of the waste stream - a huge
improvement. They have also improved the quality of the products
they are producing, most notably the oil. New technology allows
them to extract a lot more of the water and grit. It is now
being used as a supplement for cattle feed and animal treats.
The other thing it has allowed them to do is to be a lot more
aggressive in purchasing of salmon. It's opened up opportunities
that weren't there before.
"So, when we can be more aggressive, there's a lot of
beneficiaries - our fleet, our employees are getting
more work, we're buying more fish, so there's more
taxes generated. That kicks back to the City of Seward
and certainly to the state of Alaska.... I feel like
the incentives that were provided to us from the State
of Alaska really helped us with economic development
that had some spin offs beyond just our own
company.... I also want to say that the Department of
Revenue has been good to work with.... We certainly
run our ideas past Mr. Harlamert before we proceed
with them to make sure that it is a project that is
going to be eligible for a tax credit.... In our
business the margins are pretty small and in some
years there aren't any....
MS. NORRIS said Icicle Seafoods is very interested in having the
opportunity to have some tax credits applied for additional meal
and oil plants. Its new technology in the Seward plant has only
operated one year and management is convinced it will have even
better results this year because they know a lot more about the
equipment and are considering investing more money into some of
their other locations. She said, "If it hadn't of been for the
tax incentive provided by the state, we probably wouldn't have
made that investment...." and thought the spin offs would be
very big.
4:28:41 PM
SENATOR SEEKINS asked how she felt about a tax credit pre-
purchase approval system with the Department of Revenue.
MS. NORRIS replied that has been her practice - to call the
Department of Revenue first to make sure their idea would fly
with them. She was told no about her pop-top idea. "It kept us
from doing the project."
4:29:48 PM
SENATOR SEEKINS asked if she had been able to get approval for a
pop-top system, would it have meant incremental business or just
a transfer in what they do.
MS. NORRIS replied that she thought it would bring in new
customers.
4:30:27 PM
REED STOOPS, Ocean Beauty Seafoods, supported SB 164. Ocean
Beauty is one of the larger salmon producers in Alaska and the
tax credit program was the determining factor in its purchasing
new equipment for its Excursion Inlet (in Southeast) and Alatak
plants (in Kodiak). It increased the number of employees in both
plants, expanded the number of fish they purchased and extended
the season at both ends. All this enabled them to find a market
for lower-value fish products.
SENATOR STEDMAN asked under what circumstances Ocean Beauty
purchased their plant at Excursion Inlet.
MR. STOOPS explained that Ward Cove decided to close all of its
seafood plants in Southeast and Bristol Bay and at that point
there was a risk of there being no major processor in this part
of Southeast to buy salmon. The governor and some other business
people who were dependent on that business looked for seafood
processors who could take Ward Cove's place. Ocean Beauty agreed
to buy the Excursion Inlet and Alatak plants. A lot of the
employees were hired back and then Ocean Beauty focused on
updating the equipment. Last year, because of the tax credit,
they purchased some new equipment and now they want to purchase
more equipment of the same nature or expand the number of plants
that have the value-added capability.
4:33:12 PM
He said, "This legislation means the difference between doing
more in Alaska rather than just doing the same thing on a
continuing basis."
4:35:23 PM
SENATOR STEDMAN put forth a conceptual amendment to include
conversion or installation of pop-tops in language that excludes
all cans.
SENATOR ELTON thanked the sponsor for that amendment and said he
is comfortable with him offering it in the Finance Committee
where he has a seat.
4:37:02 PM
SENATOR BEN STEVENS asked Ms. Norris if Icicle Seafoods is going
to invest in another plant.
MS. NORRIS replied affirmatively. While she understood there
were abuses of that particular credit, she thought an argument
could be made that including those kinds of operations directly
helped Icicle add value to guts, viscera, frames, carcasses and
skins that would normally not have been utilized.
SENATOR BEN STEVENS recalled that the evolution of the
utilization actually came from trying to help a situation the
Department of Environmental Conservation (DEC) had with
discharge issues. He asked Mr. Stoops if that plant installed
utilization equipment as well.
REED STOOPS replied yes that they put in new equipment for full
utilization.
SENATOR BEN STEVENS asked the department how much money was used
to purchase new utilization-of-waste equipment versus the other
portion of the bill that caused them problems.
4:41:06 PM
MR. HARLAMERT said he couldn't disclose the exact amount of the
credit, but a majority of the waste credit went for utilization-
of-waste property. But, that was not true in 2003 when it was
almost nil. In 2004, more than half of all the credit claimed
for waste was investment in property to utilize salmon waste and
to create products from it.
4:42:49 PM
SENATOR STEDMAN moved to pass SB 164 from committee with
individual recommendations and attached fiscal notes. There were
no objections and it was so ordered.
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