Legislature(2003 - 2004)

04/08/2003 08:07 AM House CRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 216-MUNI TAXATION OF REFINED FUEL PRODUCTS                                                                                 
CHAIR MORGAN announced that the  final order of business would be                                                               
HOUSE BILL  NO. 216,  "An Act relating  to municipal  taxation of                                                               
refined fuel products."                                                                                                         
Number 1260                                                                                                                     
REPRESENTATIVE ANDERSON, spoke  on behalf of the  House Labor and                                                               
Commerce   Standing   Committee,   the   sponsor   of   HB   216.                                                               
Representative  Anderson explained  that HB  216 clarifies  local                                                               
taxing authority for  refined fuels sold both  inside and outside                                                               
of  a local  jurisdiction.   Furthermore,  HB  216 clarifies  the                                                               
local jurisdiction's  right to tax  any fuel consumed  within its                                                               
governmental boundaries, although  local jurisdictions don't have                                                               
taxing authority  for value-added  products refined  for shipment                                                               
and  sale outside  the  local boundaries.    He highlighted  that                                                               
clarification is also  necessary in order to limit  the number of                                                               
entities that  can tax fuel.   Representative Anderson  said that                                                               
the  clarification  contained  in   HB  216  will  benefit  local                                                               
governments.  In noting the  uncertainty in state law with regard                                                               
to the  authority to tax  fuel, Representative  Anderson referred                                                               
to former  Alaska Attorney  General Avrum  Gross's May  29, 2002,                                                               
opinion  for the  Fairbanks North  Star  Borough.   He urged  the                                                               
committee's  support for  HB  216 and  concluded  by noting  that                                                               
Representative  Samuels   may  offer   an  amendment   worthy  of                                                               
consideration  so  long as  the  amendment  doesn't take  away  a                                                               
federal mandate.                                                                                                                
Number 1514                                                                                                                     
JEFF  COOK, Vice  President,  External  Affairs, Williams  Alaska                                                               
Petroleum, Inc., provided the following testimony:                                                                              
     Williams  operates Alaska's  largest refinery  at North                                                                    
     Pole  near  Fairbanks.    In  addition,  Williams  owns                                                                    
     products  and  terminals in  Fairbanks  [International]                                                                    
     Airport and  at the Port  of Anchorage.  We  operate 29                                                                    
     convenience  stores  in  seven Alaska  ...  communities                                                                    
     throughout  Alaska.    And  we also  own  a  3  percent                                                                    
     interest  in  the  Trans-Alaska Pipeline.    Since  our                                                                    
     refinery at North Pole came  on-line just over 25 years                                                                    
     ago, we have purchased a  total of $300 million barrels                                                                    
     of crude  oil from the  State of Alaska  royalty crude.                                                                    
     Paying the  state approximately $5 billion  dollars for                                                                    
     that crude.   Our refinery and the  other refineries in                                                                    
     Alaska have  been a real  value-added success  story in                                                                    
     Alaska's economy.                                                                                                          
     I am here to support  HB 216 and the sponsor statement.                                                                    
     And the comments by  Representative Anderson provide an                                                                    
     excellent summary  of the reasons  this bill  should be                                                                    
     supported.    On  June  25th of  last  year  a  special                                                                    
     election was held for the  Fairbanks North Star Borough                                                                    
     to  determine if  a two  cent per  gallon transfer  tax                                                                    
     should  be enacted.   That  would  offset property  tax                                                                    
     under the  revenue cap that  the borough had  in place.                                                                    
     Fortunately, the  tax proposal failed  by a vote  of 62                                                                    
     percent "No" to  38 percent "Yes," but  that process in                                                                    
     the  election did  bring to  the forefront  a potential                                                                    
     taxing  problem that  could  be  devastating to  Alaska                                                                    
     refiners;  one  that   discourages  future  value-added                                                                    
     investments in the Alaska refining  business.  Had that                                                                    
     tax passed,  Williams Alaska and our  neighbor refinery                                                                    
     Petro Star  owned by Arctic Slope  Regional Corporation                                                                    
     would have had to pay out  in excess of $20 million per                                                                    
     year, though we  think there were a  lot of exemptions,                                                                    
     especially on  the jet  fuel.   And we  simply wouldn't                                                                    
     have paid  the tax and  let the borough  establish that                                                                    
     we did  in fact owe it.   That added cost  could not be                                                                    
     passed  on to  the majority  of our  consumers as  they                                                                    
     have alternative  sources of supply.   Williams refines                                                                    
     about  70,000 barrels  a day  of product  and about  60                                                                    
     percent  of  that product  is  jet  fuel with  over  90                                                                    
     percent of  that product  shipped by  rail for  use not                                                                    
     only  at the  Anchorage Airport  but barged  to coastal                                                                    
     communities and river communities  in Alaska for use at                                                                    
     their  airports  as well  as  other  home heating  fuel                                                                    
     products:   gasoline and diesel for  generation is also                                                                    
     exported by barge.                                                                                                         
MR. COOK continued:                                                                                                             
     The air passenger and air  cargo business in particular                                                                    
     are very competitive.  The  air carriers will not pay a                                                                    
     penny  more for  a gallon  of fuel  than is  necessary.                                                                    
     The  recent  decision by  Air  France  to pull  out  of                                                                    
     Fairbanks to use longer range  aircraft and now be able                                                                    
     to   fly  over   Russian   airspace   points  out   the                                                                    
     vulnerability of  the air  traffic business  in Alaska.                                                                    
     That  pull out  from Fairbanks  [International Airport]                                                                    
     has a significant economic impact.   It would be unwise                                                                    
     to  burden air  carriers in  a very  competitive market                                                                    
     with  anymore taxes  that  they would  not  be able  to                                                                    
     absorb.   I  might  also  add that  we  have a  growing                                                                    
     market  in  the  export  of  a  product  that  we  call                                                                    
     naphtha,  which is  a gasoline  blend stock.   And  our                                                                    
     trading partner  (indisc.) recently built  an ice-class                                                                    
     vessel ...  so that they  can take that product  in and                                                                    
     out year round  from the Port of  Anchorage; and that's                                                                    
     a   significant  economic   benefit   that  would   be,                                                                    
     certainly,  in  jeopardy  if  we pile  taxes  on.    An                                                                    
     additional  point that  was brought  up is  our concern                                                                    
     that there  are as  many as eight  taxing jurisdictions                                                                    
     between  our  North  Pole  refinery  and  the  Port  of                                                                    
     Anchorage where we  ship our fuel.   Actually, three of                                                                    
     those are in Fairbanks since  we have the City of North                                                                    
     Pole, City  of Fairbanks, and the  Fairbanks North Star                                                                    
     Borough.    If  all  of these  entities  did  tax  fuel                                                                    
     exported from  Fairbanks we would ...  simply be driven                                                                    
     out of business; we couldn't  be competitive.  It is in                                                                    
     the  best  interest of  the  State  of Alaska  and  the                                                                    
     consumers of  Alaska to  have an  equal tax  on refined                                                                    
     products exported out of any  refining community.  This                                                                    
     is important for the preservation  of jobs and economic                                                                    
     impact  from   the  Alaska  refineries,  and   also  to                                                                    
     encourage those refineries to do future expansions.                                                                        
     Alaska refiners, right now, are  faced with millions of                                                                    
     dollars of  new investment by  the end of 2006  to meet                                                                    
     federally  mandated  clean  fuel  requirements.    Such                                                                    
     investment   would   be   certainly   discouraged   and                                                                    
     difficult to  do if  we had  these additional  taxes on                                                                    
     our product.  There is  also something unfair in having                                                                    
     taxpayers from other  parts of Alaska pay  the cost for                                                                    
     local  government, say  in  Fairbanks.   The  Fairbanks                                                                    
     property owners  would've received property  tax relief                                                                    
     and  consumers of  gasoline,  heating  fuel, and  other                                                                    
     products  in the  state  would  potentially pay  higher                                                                    
     prices for those products.   We really couldn't pass it                                                                    
     on,  in  most   cases,  to  the  airlines.     In  that                                                                    
     competitive business ...  the market might end  up in a                                                                    
     higher price on consumer  products other than airlines.                                                                    
     And those  people in  Fairbanks should  be able  to see                                                                    
     the  inequity of  this also.   If  you wanted  to carry                                                                    
     this  type of  taxation  to its  extreme,  the Port  of                                                                    
     Anchorage, which  is owned  by the  municipality, could                                                                    
     decide they  want to tax  every pound of  freight going                                                                    
     north as  sort of a payback  for a fuel tax  that their                                                                    
     consumers  might have  to pay  based  on a  tax out  of                                                                    
     Fairbanks.   I don't think this  is a trend we  want to                                                                    
     see  starting in  Alaska.   And as  noted prior  to the                                                                    
     vote  in  Fairbanks  last  June,  the  former  attorney                                                                    
     general  Avrum  Gross  did render  an  opinion  to  the                                                                    
     Fairbanks  North Star  Borough  at the  request of  the                                                                    
     Assembly  and  he concluded,  as  noted,  there was  no                                                                    
     certainty  on  that taxing  authority.    We feel  that                                                                    
     passage  of House  Bill  216 will  be  good for  Alaska                                                                    
     refiners, local  governments, and  consumers.   It will                                                                    
     clarify taxing authority, create  a level playing field                                                                    
     for  refiners throughout  the  state  and avoid  costly                                                                    
     litigation  and court  challenges in  the future.   So,                                                                    
     ...  I would  urge, both  on  behalf of  myself and  my                                                                    
     company you to pass House Bill 216.                                                                                        
Number 1866                                                                                                                     
REPRESENTATIVE KOOKESH asked if  Williams Petroleum Alaska, Inc.,                                                               
pays some sort of tax in Fairbanks already.                                                                                     
MR. COOK  answered that the  company pays property tax  and ranks                                                               
the second highest in assessed  value in the Fairbanks North Star                                                               
Borough.  Williams  Petroleum Alaska, Inc., pays in  excess of $3                                                               
million.    In  response  to  Representative  Kookesh,  Mr.  Cook                                                               
explained that  the only taxing  done now  is within the  City of                                                               
North  Pole.   There  are  no  fuel  taxes  levied by  the  other                                                               
REPRESENTATIVE  ANDERSON  inquired  as to  what  other  companies                                                               
would be impacted by [HB 216].                                                                                                  
MR. COOK responded that potentially  all of the refiners would be                                                               
impacted  by this  legislation.   He  identified  the Petro  Star                                                               
refinery and Tesoro in Nikiski.                                                                                                 
CHAIR MORGAN asked if Mr.  Cook's earlier comment regarding clean                                                               
fuel was in reference to ultra-low sulfur fuel.                                                                                 
MR. COOK replied  yes.  In further response to  Chair Morgan, Mr.                                                               
Cook  explained  that  Williams   Petroleum  Alaska,  Inc.,  will                                                               
upgrade  its  refinery for  gasoline.    He noted  that  Williams                                                               
Petroleum Alaska,  Inc., refines about 6,000  barrels of gasoline                                                               
a day and  Tesoro refines about 11,000 barrels.   For diesel, Mr.                                                               
Cook pointed out that low  sulfur diesel is initially applying to                                                               
highway diesel.  Only 5 percent  of the diesel consumed in Alaska                                                               
is  highway  diesel.   Williams  Petroleum  Alaska,  Inc.,  can't                                                               
justify the extreme expense, $120-$140  million for 800 barrels a                                                               
day out of  the 6,300 barrels a day of  diesel, [for changing the                                                               
facilities to produce ultra-low sulfur diesel].                                                                                 
Number 2030                                                                                                                     
JIM BOLTZ,  Chief Operating Officer,  Petro Star,  Inc., informed                                                               
the committee  that Petro  Star is a  wholly owned  subsidiary of                                                               
Arctic  Slope  Regional  Corporation,   and  operates  two  small                                                               
refineries  in Alaska.   The  refinery  at North  Pole has  crude                                                               
capacity of  $16,000 barrels per  day and the larger  refinery at                                                               
Valdez has a capacity of  $50,000 barrels per day.  Additionally,                                                               
Petro Star  owns and operates  fuel distributorships  and product                                                               
terminals in  Fairbanks, Valdez,  Kodiak, and Dutch  Harbor along                                                               
with 11 convenience stores and  a lubricants division.  Mr. Boltz                                                               
pointed out  that Petro  Star is  a small  player that  has grown                                                               
substantially since it was founded in 1984.                                                                                     
MR. BOLTZ announced support of  HB 216.  Clarification that local                                                               
governments have the right to  tax any fuel consumed within their                                                               
governmental  boundaries  but  don't have  taxing  authority  for                                                               
value-added products  refined for  sale outside  local boundaries                                                               
is necessary.   Mr.  Boltz related Petro  Star's concern  that it                                                               
stay competitive  in all the  markets.   Therefore, clarification                                                               
to limit the number of entities  that can tax fuel in each market                                                               
is extremely important.  This is  important to Petro Star as well                                                               
as  to consumers.   He  highlighted  that Petro  Star along  with                                                               
other Alaska refiners face millions  of dollars of new investment                                                               
in the  next few  years in  order to  met the  federally mandated                                                               
ultra-clean fuel  standards.  Mr.  Boltz emphasized that  it's in                                                               
the  best interest  of  all  residents of  Alaska  to make  these                                                               
investments and  continue to provide  high quality fuels  to meet                                                               
our future needs.  Passage of HB  216 will be good for Alaska, he                                                               
said, and thus he urged the committee's support.                                                                                
Number 2173                                                                                                                     
KEVIN  RITCHIE,  Executive   Director,  Alaska  Municipal  League                                                               
(AML),  expressed  concern  that  the  current  language  of  the                                                               
legislation  doesn't  really  accomplish  the intent  in  a  good                                                               
manner.   He  drew  attention to  page  1, line  12,  which is  a                                                               
general prohibition  against taxation  against any  fuel products                                                               
inside or outside  the borough, including heating  fuel and motor                                                               
oil.   On  page  1,  line 14,  the  language  specifies that  the                                                               
municipality "may  impose a sales  or transfer tax on  motor fuel                                                               
that is  not transported  for sale  or distribution  outside that                                                               
municipality."   Therefore, municipalities would only  be allowed                                                               
to tax  fuel at the  pump under a sales  tax.  This  overly broad                                                               
prohibition  would have  a massive  negative impact  on municipal                                                               
revenue.   Even if the  aforementioned language is  flip flopped,                                                               
one still needs  to be cautious with regard to  the wording about                                                               
municipalities.    For  example,  if  there  was  a  heating  oil                                                               
distributor  in  Soldotna that  transported  fuel  to a  customer                                                               
outside of  Soldotna that would  potentially become  a nontaxable                                                               
transaction.   However, now the  borough collects a tax  the city                                                               
has on sales.  Therefore,  there are lots of down-stream impacts.                                                               
Mr. Ritchie  drew attention to  AS 29.45.650 which  addresses the                                                               
problem of duplicate taxation.   He offered to work with whomever                                                               
to develop a solution that doesn't have unintended impacts.                                                                     
Number 2377                                                                                                                     
REPRESENTATIVE CISSNA  inquired as to the  correction Mr. Ritchie                                                               
would suggest.                                                                                                                  
MR. RITCHIE  said that  he wasn't  sure.   He reiterated  that he                                                               
would work  with the state  in order  to develop a  solution that                                                               
doesn't   negatively  impact   municipalities.     However,   the                                                               
legislature  has  already  determined  that  it  isn't  fair  for                                                               
[multiple]  municipalities to  tax the  same thing  and thus  the                                                               
existing statutory  structure may offer  a solution.   He related                                                               
his understanding that such is the intent of HB 216.                                                                            
Number 2453                                                                                                                     
REPRESENTATIVE ANDERSON informed the  committee that Tamara Cook,                                                               
Executive Director, Legislative Legal  and Research Services, has                                                               
indicated that  [the language] is  inextricably connected  to the                                                               
intent  of the  legislation.   He inquired  as to  an example  of                                                               
where the language would create a problem.                                                                                      
MR. RITCHIE  pointed out that  page 1, lines 12-13,  specify that                                                               
"a municipality  may not impose  a property, sales, or  other tax                                                               
on  refined  fuel  products  or   constituents  of  refined  fuel                                                               
products."  That language is  a broad blanket saying that refined                                                               
fuel products can't be taxed,  including home heating fuel, motor                                                               
oil,  et  cetera.    He  related his  belief  that  there  is  no                                                               
definition  for  refined  fuel product.    The  legislation  only                                                               
allows  municipalities to  charge a  sales/transfer tax  on motor                                                               
fuel,  which   he  identified  as   gas  or  diesel   that  isn't                                                               
transported for  sale or  distribution outside  the municipality.                                                               
Therefore, municipal taxation would be  narrowed and a whole host                                                               
of revenue that municipalities utilize would be eliminated.                                                                     
REPRESENTATIVE  CISSNA  asked  if redefining  it  with  specifics                                                               
would work.                                                                                                                     
REPRESENTATIVE   ANDERSON   said   perhaps  and   expressed   his                                                               
discomfort with making alterations without legal counsel.                                                                       
REPRESENTATIVE  SAMUELS remarked  that he  didn't have  a problem                                                               
with the  intent of the  legislation.   He noted his  conflict of                                                               
interest due  to his  employment by  an airline.   Representative                                                               
Samuels informed  the committee  that there are  federal statutes                                                               
that determine how  [the taxes] can be spent.   He explained that                                                               
if the municipality  taxes jet fuel at  the state-owned Anchorage                                                               
International Airport,  where the bulk  of it is sold,  the taxes                                                               
can only  be spent  at a municipally  owned airport.   Therefore,                                                               
passengers living in Fairbanks and  flying [into] Fairbanks would                                                               
pay for  Merrill Field because  it's a municipal airport.   There                                                               
are very few municipally owned  airports.  Representative Samuels                                                               
noted that  he has  drafted an  amendment to  address this.   The                                                               
amendment  is  on  page  1,   line  14,  "exclude  fuel  use  for                                                               
REPRESENTATIVE ANDERSON  requested that  HB 216  be held  over so                                                               
that  he could  work with  the  interested parties  to develop  a                                                               
committee substitute.                                                                                                           
CHAIR MORGAN agreed and thus HB 216 was held.                                                                                   

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