Legislature(1997 - 1998)
04/06/1998 01:30 PM House FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 472
"An Act relating to apportionment of business income."
REPRESENTATIVE NORMAN ROKEBERG observed that the House Labor
and Commerce Committee introduced HB 472 on behalf of
businesses in the state of Alaska. He noted that the Alaska
Supreme court ruling, State of Alaska vs. OSG BULK Ships,
Inc., held that the exemption from taxation granted in 26
U.S.C. Section 883 was modified by the Alaska Corporation
Net Income Tax (ANITA). Since state law modified federal
law, the Court ruled that the exemption under Section 883
does not apply. He maintained that the Legislature intended
that the Section 883 federal exemption apply when it enacted
the Internal Revenue Code by reference. The Court's ruling
has by implication created a new assessment on the net
income of foreign flagged/owned carriers. He added that
aircraft, railroad rolling stock and communication
satellites would also be affected. He asserted that a new
tax burden would be created on international trade in the
State. Almost every natural resource that is produced,
manufactured or exported is shipped on foreign carriers. He
pointed out that the federal government, by treaty, has
entered into agreements with various foreign governments.
The United States government and the reciprocating
governments agree not to tax net corporate income of
businesses engaged in international trade. He maintained
that it could create a situation of double taxation. It
would also be difficult to account for the tax. The state
of Alaska has never collected the tax. The State has
collected waivers by not imposing the tax. The tax has been
in litigation for a decade. He asserted that failure to act
on the legislation would send a very bad signal. He
observed that the legislation has received support from a
number of national and international businesses. He read
testimony by Representative Fran Ulmer during a 1991 House
Finance Committee meeting on similar legislation.
Representative Ulmer stated that she would not support
legislation that was inconsistent with the intent to send a
message that Alaska is a friendly business climate for
foreign investors.
ROBERT B. STILES, DRVEN CORPORATION testified in support of
the legislation. He observed that in most cases the
producer is not the one that arranges the shipping. Buyers
often arrange for shipping. Part of the problem is
identifying foreign owners. The exemption granted by
Section 883 recognized that it would be difficult to collect
the tax. He maintained that the state of Alaska would
expose itself to retribution.
GENERAL MANAGER, SHERATON ANCHORAGE HOTEL, ANCHORAGE
testified in support of HB 472. He noted that they are
affiliated with Korean Air. Korean Air has been in business
in Alaska for 20 years. They own shares in Anchorage
hotels, and employ approximately 30 people at the Anchorage
airport. They have a variety of other business interests in
Alaska. They employee approximately 350 people in Alaska.
There are approximately 12 foreign carriers that fly into
Alaska. There were approximately 20 - 25 carriers in 1987.
He explained that some carriers no longer fly into Anchorage
because aircraft can now over-fly Anchorage due to
technological advancements. He emphasized that Anchorage is
not a final destination. He stressed the fiscal impact of
the 12 foreign carriers that come to Alaska. He pointed
out that, currently, the cost of doing business in Anchorage
is good. The state of Alaska would be the only state in the
nation to levy such a tax. He asserted that collection of
the tax would have a drastic impact.
(Tape Change, HFC 98 - 92, Side 2)
SUSAN BURKE, ATTORNEY, NORTHWEST CRUISE SHIP ASSOCIATION
testified in support of the legislation. She observed that
she wrote an Attorney General's opinion in 1980, regarding
the retroactive clause. She noted that the situation in HB
472 is different to the situation on which the 1980 opinion
was based. She added that new case law indicates that a
retroactive clause can stand if it serves the public
purpose. House Bill 472 has a narrow focus. She observed
that state businesses rely on foreign shippers. If shippers
are made to pay back taxes with interests, they may respond
with rate increases. She concluded that HB 472 serves a
public purpose by maintaining current rates. She did not
think there would be a constitutional problem.
In response to a question by Representative Martin, Ms.
Burke reviewed arguments that a 1991 transmittal letter by
Governor Hickel indicated that the state of Alaska intended
to collect the tax. She stated that she did not interpret
the letter to specify that the exemption under the federal
IRS code, Section 883, did not apply. She observed that the
State's position was not clear because even if the
transmittal letter was meant to imply that the exemption did
not apply, the Department of Revenue's position was that the
exemption did apply. Section 883 was incorporated into the
state tax code by reference. The Legislature also indicated
that the exemption would apply.
Representative Davies questioned the effect of a retroactive
clause. Ms. Burke clarified that there are tax cases
pending in the administrative process. Some taxes have been
assessed but not collected.
In response to a question by Representative Martin, Ms.
Burke observed that the water's edge method was adopted in
1992.
DEBORAH VOGT, DEPUTY DIRECTOR, DEPARTMENT OF REVENUE
reviewed the legislation. She observed that on February 20,
1998, the Alaska Supreme Court issued a unanimous decision
that a federal tax exemption does not apply in Alaska. The
case was OSG Bulk Ships v. State (OSG). The federal
provision exempts income from foreign-owned ships and
aircraft. Result of the decision is that ships and aircraft
that do business in Alaska will be taxed regardless of
ownership. She did not think that either railroads or
satellites would be affected. The result of the decision is
that ships and aircraft that do business in Alaska would be
taxed regardless of their ownership.
Ms. Vogt explained that the case arose from a decision
signed by Commissioner Rexwinkle, in June 1990. The
taxpayer was a shipper of ANS crude on American ships. The
issue arose because corporations affiliated with the
taxpayer were included in the apportionable base. They did
not carry goods in Alaska. The Superior Court held against
the state. The state appealed to the Supreme Court. The
state of Alaska then appealed to the Supreme Court and
prevailed.
Ms. Vogt maintained that the OSG decision was a good
decision for the State. It deals with the interrelationship
of Alaska and federal tax law. The OSG decision holds that
Alaska's tax policy, as articulated in tax laws passed by
the Legislature, should be given as fact when reviewing the
interplay between the Internal Revenue Code and the State's
Corporate Income Tax. The decision brings cruise ships,
foreign air operations, and foreign shippers into Alaska's
tax scheme on an even footing with other shippers, American
cruise ship operators and air carriers.
Ms. Vogt noted that the basis for the State's holding is
that the State can incorporates Internal Revenue Code into
state tax, unless excepted to or modified by Alaska law.
The federal exemption essentially codifies federal tax
treaties, which provide that "if your country doesn't tax
our ships and planes, we won't tax yours". These treaties
are at a national level. They do not bind subnationals like
states. She acknowledged that there could be retaliation
under the treaties if one subnational begins taxing. The
federal system permits federal taxes for any foreign tax
paid. American businesses would receive a dollar for dollar
credit on their federal taxes for any taxes paid to other
nations.
Ms. Vogt observed that the issue for the Court was: Does
Alaska's Corporate Income Tax system except or modify the
federal exemption in Section 883. The court found that the
State's use of the apportionment method of taxation was so
different from the federal separate accounting approach to
defining income that Section 883 was not incorporated into
Alaska law. This bill would reverse the Court's decision.
Ms. Vogt pointed out that Alaska's corporate income tax
system has always used formula apportionment to determine
the in-state income of businesses that earn income in the
State. Business income from all sources is assessed and
apportioned by a formula related to business presence. In
1970, the State joined the Multistate Tax Commission and
adopted the Uniform Division of Income for Tax Purposes Act
(UDIPTA). The state of Alaska originally applied UDIPTA
worldwide. There was a great deal of international
objection to this form of taxation. Foreign affiliates that
did not operate in the United States objected to providing
books and records to the United States.
In 1991, Alaska joined the majority of other states, in
moving to the waters edge method. The waters edge approach
excludes from the corporate family those corporations that
do not do any business, or do a very small amount of
business, in the United States. Ironically, the ships whose
income was taxed in OSG would not be included in our tax
base today because of the adoption of the waters edge
method. Pursuant to the Court's decision, the State will
tax foreign ships and aircraft by formula apportionment,
using a "days in port" or "ground time" approach to their
factors. This applies to all U.S. ships that do business in
Alaska. Ships are apportioned based on the number of days a
ship is in Alaskan ports versus the total number ports.
Airlines are apportioned based on departures.
Ms. Vogt discussed retroactivity. She referred to a
memorandum from the Department of Law, which raised serious
legal questions about the constitutionality of the
retroactive collection of the tax. The reason the
constitutional issue arises is that Alaska's Constitution
provides that appropriations have to be made for a public
purpose. Tax repeal is considered an appropriation. If
there is no provision, the Department of Revenue is unlikely
to assign any of its scarce resources to compliance efforts
under a repealed tax.
Ms. Vogt referred to the Department's fiscal note. She
observed that, since most of these transportation companies
do not file tax, the Department does not have direct
information from taxpayers. The Department of Revenue
estimates a potential loss of $3 to $8.5 million dollars.
Representative Martin questioned how much the state of
Alaska would lose in revenues, if businesses moved out of
state. He emphasized that the tax could have a detrimental
affect on the State. Ms. Vogt stressed that the Department
would need more information to assess the impact.
In response to a question by Representative Martin, Ms. Vogt
clarified that the legislation does not affect the waters
edge method. Foreign corporations are taxed to the extent
that they do business in Alaska. The legislation only makes
an exemption for certain components of foreign commerce.
In response to a question by Representative Grussendorf, Ms.
Vogt stated that the legislation would not preclude future
action.
Co-Chair Therriault asked if the Administration had taken a
stand on the potential loss of business. He questioned if
the cost of implementation and the loss of business would be
sufficient state interest to support the legislation.
In response to a question by Representative Davis, Ms. Vogt
stated that the prospective audits would not be problematic.
JEFF BUSH, DEPUTY COMMISSIONER, DEPARTMENT OF COMMUNITY AND
REGIONAL AFFAIRS testified in support of the legislation.
He acknowledged the importance of the litigation to assert
the right of the state of Alaska to enact appropriate tax
laws and to implement them without federal restrictions.
The Department supports the legislation because there are
other policy considerations. The benefits to state business
out weighs increased revenues. No other states impose a
similar tax. A tax would detrimentally impact the
perception that Alaska is friendly to foreign owned
shippers.
Representative Martin MOVED to report HB 472 out of
Committee with the accompanying fiscal note. There being NO
OBJECTION, it was so ordered.
HB 472 was REPORTED out of Committee with a "do pass"
recommendation and with fiscal impact note by the Department
of Revenue.
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