Legislature(1997 - 1998)

04/06/1998 01:30 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
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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