02/17/2012 03:30 PM Senate RESOURCES

               SB 176-EXEMPTIONS FROM MINING TAX                                                                            
                                                                                                                                
5:04:44 PM                                                                                                                    
CO-CHAIR WAGONER  announced consideration of SB  176 [version 27-                                                               
LS1201\M was before the committee].                                                                                             
                                                                                                                                
CO-CHAIR PASKVAN moved  to bring CSSB 176( ),  version \B, before                                                               
the committee for purposes of discussion.                                                                                       
                                                                                                                                
CO-CHAIR WAGONER objected for discussion purposes.                                                                              
                                                                                                                                
MARGRET DOWLING, staff to Senator  Wagoner, explained that the CS                                                               
to  SB  176,  removes  standing gravel  operations,  quarry  rock                                                               
operations and  marketable earth  from the mining  licensing tax.                                                               
This is because  it is extremely cumbersome to  both industry and                                                               
the state.  For example,  in the  last five  years an  average of                                                               
about $268,000  was collected as  a result of the  mining license                                                               
tax,  and it  cost the  Department of  Revenue about  $150,000 to                                                               
collect it. In  addition, in FY2011 when the  182 operations were                                                               
subject  to  the   tax,  that  included  both   sand  and  gravel                                                               
operations and  quarry rock operations. Of  those 182 operations,                                                               
only 17  were actually required  to pay the tax,  largely because                                                               
many  of   them  were  small   operations  serving   their  local                                                               
communities  that  fell  within  the $40,000  exemption  for  net                                                               
taxable income.                                                                                                                 
                                                                                                                                
5:07:30 PM                                                                                                                    
MS.  DOWLING  said  it's  cumbersome  to  tax  these  businesses,                                                               
because  they  produce  many  products   -  different  grades  of                                                               
aggregate, sand, concrete, concrete blocks,  pit run and the like                                                               
-  and in  order to  comply with  this tax,  all of  the expenses                                                               
associated with  each product have  to be tracked.  Sometimes one                                                               
expense can be  attributed to a number of  different products and                                                               
their  task, then,  is  to try  to determine  which  part of  the                                                               
expense  is attributable  to  which product  and  to allocate  it                                                               
appropriately.                                                                                                                  
                                                                                                                                
It  gets  fairly complex  and  involves  quite  a bit  of  record                                                               
keeping.  A letter  in their  packets  from Secon  said it  takes                                                               
about 200 hours per year to  do the recording keeping required to                                                               
file a  tax return and  respond to  audit requests. If  a company                                                               
owns  more than  one pit,  it  has to  file  a tax  return and  a                                                               
schedule for each  pit. Even if an operation is  so small that it                                                               
qualifies for  the $40,000  net income  exemption, it  still must                                                               
file a  tax return and  keep records. That  is why the  burden of                                                               
this  tax is  pretty  extraordinary relative  to  the actual  tax                                                               
revenue that is generated.                                                                                                      
                                                                                                                                
5:09:27 PM                                                                                                                    
MS. DOWLING  pointed out that  60 to  80 percent of  the material                                                               
that comes  out of the  ground in  Alaska goes into  public works                                                               
projects  that serve  state residents  in local  communities. So,                                                               
what really  happens is  that the  state ends  up paying  on both                                                               
sides of the equation; they pay to  collect the tax and then as a                                                               
consumer it  ends up paying  for the  tax again. In  addition, it                                                               
pays  for the  overhead portion  for the  bookkeeping that  these                                                               
companies have to add to the price of their materials.                                                                          
                                                                                                                                
5:10:28 PM                                                                                                                    
MS.  DOWLING  explained  that the  reason  marketable  earth  was                                                               
included in this  measure was to address a  Department of Revenue                                                               
and  industry concern  that once  they took  out sand  and gravel                                                               
that someday  some regulator or  some member of the  public would                                                               
see marketable earth  and wonder if it included  sand and gravel.                                                               
She  understood  that  there  are  no  tax  returns  filed  under                                                               
marketable earth now, so it wouldn't cause any harm.                                                                            
                                                                                                                                
In addition,  she said, the  reason quarry rock was  excluded was                                                               
because there  are just too few  of them. In the  last five years                                                               
only  four to  six companies  have filed  tax returns  under that                                                               
designation. So  keeping quarry  rock in  would not  be achieving                                                               
the   efficiencies  they   are  trying   to  achieve   with  this                                                               
legislation.                                                                                                                    
                                                                                                                                
5:11:40 PM                                                                                                                    
SENATOR WIELECHOWSKI said they had heard  a lot over the last few                                                               
years about  rare earth minerals  and he wanted to  be absolutely                                                               
certain that taking  out marketable earth was  not removing those                                                               
sorts of things.                                                                                                                
                                                                                                                                
5:12:23 PM                                                                                                                    
JOHANNA  BALES,  Deputy  Director, Tax  Division,  Department  of                                                               
Revenue (DOR),  said her understanding  is that  marketable earth                                                               
includes things  such as peat,  top soil  and clay. She  said the                                                               
Department of Law looked at  the rare earth elements to determine                                                               
whether or  not that  would cause  a problem,  but to  be honest,                                                               
they  weren't sure  those  types of  elements  were even  covered                                                               
under the mining license tax.                                                                                                   
                                                                                                                                
Another  good point  to consider  was that  rare earth  elements,                                                               
unlike  the marketable  earth, such  as  peat and  top soil,  are                                                               
locatable minerals,  and excluding the marketable  earth wouldn't                                                               
affect  them,   but  this   issue  should   lead  to   a  further                                                               
conversation and  some research in  the future if the  rare earth                                                               
elements start being produced.                                                                                                  
                                                                                                                                
5:13:33 PM                                                                                                                    
SENATOR WIELECHOWSKI  said he thought the  conversation needed to                                                               
happen  now  if  they  are contemplating  removing  it  from  the                                                               
state's tax structure. Taxes are hard  to change down the line if                                                               
someone  discovered  and started  to  mine  rare earth  minerals,                                                               
which are  extremely valuable. He  said he supported  the concept                                                               
of exempting sand, quarry rock and  gravel, but he didn't want to                                                               
go  far  beyond  that.  He   strongly  preferred  clarifying  the                                                               
definition.                                                                                                                     
                                                                                                                                
5:14:32 PM                                                                                                                    
MS.  BALES  responded   that  that  was  a   valid  concern.  The                                                               
definition of  mining in statue includes  "valuable metals, ores,                                                               
minerals,"  and  that  she would  immediately  consult  with  the                                                               
Department of  Law on  whether or not  rare earth  elements would                                                               
fit under that language.                                                                                                        
                                                                                                                                
5:15:11 PM                                                                                                                    
CO-CHAIR  WAGONER  asked her  to  do  that  and said  they  would                                                               
probably hold this bill until next Tuesday.                                                                                     
                                                                                                                                
SENATOR FRENCH concurred  with that and asked  why the department                                                               
spends $150,000 each fiscal year  examining and auditing sand and                                                               
gravel tax returns (on page 2 of the fiscal note).                                                                              
                                                                                                                                
MS. BALES explained  that that amount has been  expended over the                                                               
last  five years.  Back in  2006, the  Matanuska Susitna  Borough                                                               
contacted  them  about several  sand  and  gravel operators  that                                                               
could not get  permits from the borough because  they didn't have                                                               
the  state's  mining  license.  At  that  point,  the  department                                                               
realized that a  significant number of sand  and gravel operators                                                               
were actually  not in  compliance. So, they  spent the  last five                                                               
years  bringing several  hundred sand  and gravel  operators into                                                               
compliance.  The same  page of  the fiscal  note indicates  there                                                               
were only 11  licensees at the time, and in  2011 there were 189.                                                               
So,  about 170  taxpayers were  brought into  compliance and  the                                                               
resulting tax was  negligible. Until they did  that exercise they                                                               
had no idea that most of  the operators were small and because of                                                               
the $40,000  exemption, didn't pay  tax. She said  the department                                                               
had already  started moving  resources back  to other  excise tax                                                               
programs after diverting them to help with this.                                                                                
                                                                                                                                
5:17:42 PM                                                                                                                    
CO-CHAIR WAGONER opened the public hearing.                                                                                     
                                                                                                                                
5:17:57 PM                                                                                                                    
TONY  JOHANSEN, partner,  Great Northwest,  Inc., Fairbanks,  and                                                               
president, AGC  of Alaska, supported  SB 176. He said  early last                                                               
year  his company  received  a two-page  audit  request from  the                                                               
Department  of Revenue  concerning their  sand and  gravel sales.                                                               
The  request listed  19  detailed sets  of  information and  data                                                               
needed to  perform an  audit of  the mining  license tax  for the                                                               
years  2008 and  2009,  paperwork that  would  take their  office                                                               
manager weeks to assemble. In  frustration, he said, he contacted                                                               
John MacKinnon, the executive director  of the AGC of Alaska, and                                                               
after researching the  issue last summer, the  AGC approached the                                                               
DOR about  the problems and  with suggestions on how  the present                                                               
requirements could  be improved.  After researching  the revenues                                                               
generated and  the cost of  their collection,  the administration                                                               
recommended that  the simplest  and best  solution was  to exempt                                                               
quarry  rock  and sand  and  gravel  operations from  the  mining                                                               
license  tax  requirements. Everyone  recognized  it  as a  "true                                                               
nuisance tax."                                                                                                                  
                                                                                                                                
5:20:15 PM                                                                                                                    
MARK  COTTINI, Professional  Civil Engineer  and Vice  President,                                                               
Alaska Rock  Products Association,  Mat-Su, said he  supported SB
. He said he represented 10  gravel pits in the Mat-Su Borough                                                               
and  that  he  is  also  vice president  of  a  gravel  screening                                                               
business and owns  a pit that receives gravel  royalties from the                                                               
company that operates  it. He had never paid mining  taxes to the                                                               
state of Alaska, he said, and  all of the small gravel pit owners                                                               
and the small gravel pit  screening business think the mining tax                                                               
is  broken and  concurred with  the earlier  presenter that  they                                                               
should be exempted from the mining licensing tax.                                                                               
                                                                                                                                
5:22:06 PM                                                                                                                    
BEN SIMMONS,  Vice President and  Controller, Anchorage  Sand and                                                               
Gravel (ASG),  Anchorage, said he  has extensive  experience with                                                               
the mining  license tax and  supported SB 176. He  concurred with                                                               
prior  testimony  that  the  statute  is  very  ambiguous  as  it                                                               
pertains to sand  and gravel. For the most part  the other metals                                                               
and minerals  that are covered  by the statute are  gold, silver,                                                               
zinc, lead and so forth,  but Anchorage Sand and Gravel currently                                                               
produces and stocks 20 to 40  products made with sand and gravel.                                                               
Complying  with the  current  audit  requirements of  determining                                                               
fair  market value  for  each product  is  very cumbersome,  time                                                               
consuming and requires a lot data and a lot of paper.                                                                           
                                                                                                                                
He  said the  tax is  inconsistent as  it's applied  to sand  and                                                               
gravel producers, because each producer  is different. A supplier                                                               
like Anchorage Sand and Gravel  sells approximately 70 percent of                                                               
its  production to  third parties  and  uses 30  percent for  its                                                               
internal operations  compared to  a general contractor,  who, for                                                               
instance, sells approximately 30 percent  of his product to third                                                               
parties  and uses  70 percent  internally for  large construction                                                               
jobs.  The average  sales prices  calculation for  each of  those                                                               
exact same  products is  different from  one supplier  to another                                                               
and from producers.                                                                                                             
                                                                                                                                
MR. SIMMONS  said it just took  him more than 18  months and cost                                                               
more than  $50,000 to complete  an audit  for tax years  2005 and                                                               
2006, and the amount of  taxes collected were negligible compared                                                               
to what the state had to do to get them.                                                                                        
                                                                                                                                
5:25:21 PM                                                                                                                    
CO-CHAIR WAGONER thanked him and went to Cheryl Shafer.                                                                         
                                                                                                                                
5:25:30 PM                                                                                                                    
CHERYL  SHAFER,  owner,  Dibble   Creek  Rock,  Kenai,  said  she                                                               
supported  SB 176.  She said  her family  runs a  small sand  and                                                               
gravel and ready  mix business on the Lower  Kenai Peninsula. She                                                               
reiterated what everyone  had been saying that the  mining tax is                                                               
burdensome. Because they own a number  of pits, she has to file a                                                               
double mining tax  for each piece of property  simply because the                                                               
property  is in  their family  name  and she  is currently  being                                                               
audited by  the DOR  for three  years of  past mining  taxes. She                                                               
only  has  a two-person  office  and  has spent  weeks  supplying                                                               
information and answering questions.  It is difficult to separate                                                               
out   the  mining   activities  from   the  family's   integrated                                                               
activities. More  time is  actually spent  with trying  to comply                                                               
with filing a correct mining tax  return than for her filling out                                                               
her corporate tax return.                                                                                                       
                                                                                                                                
5:27:36 PM                                                                                                                    
CO-CHAIR WAGONER  added that  this is  an opportunity  that every                                                               
politician looks forward to -  taking something off the books not                                                               
putting something  on the  books. He  found no  further testimony                                                               
and closed the public hearing.                                                                                                  
                                                                                                                                
He  said  SB  176  would   be  held  in  committee  awaiting  the                                                               
information on rare earth minerals.