Legislature(2011 - 2012)BARNES 124
02/22/2012 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB301 | |
| HB252 | |
| HB300 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 301 | TELECONFERENCED | |
| *+ | HB 252 | TELECONFERENCED | |
| *+ | HB 300 | TELECONFERENCED | |
HB 252-INCOME TAX EXEMPTION
3:48:41 PM
CHAIR OLSON announced that the next order of business would be
HOUSE BILL NO. 252, "An Act exempting certain small businesses
from the corporate income tax; and providing for an effective
date."
3:48:51 PM
REPRESENTATIVE MIA COSTELLO, Alaska State Legislature, explained
that HB 252 would exempt certain "qualified small businesses"
with aggregate assets of $50 million or less from the state's
corporate income tax. The industries that would qualify
dovetail with the federal C Corporations identified in section
1202 of the Internal Revenue Code (IRC). These corporations are
defined as ones using 80 percent or more of their assets in the
active conduct of their businesses. The types of companies the
bill is designed to encourage include intellectual property,
software industry, and innovation. The reason the state is
trying to attract the C Corporations is because they have the
ability to attract unlimited investors. The federal legislation
allows for investors to be exempt from capital gains tax if they
keep the funds in the company for at least five years. Alaska
has found that many companies avoid filing as a C Corporation to
avoid the fifth highest corporate tax in the country, or 9.4
percent rate on $90,000 in earnings. Instead, these
corporations have been filing as S Corporations, which has
limited investors. This bill aims to attract industries to
Alaska that are not currently here and to attract the investment
that comes with those startups.
3:51:25 PM
REPRESENTATIVE JOHNSON made a motion to adopt Amendment 1
labeled 27-LS1085\M.2, Nauman, 2/17/12, which read, as follows:
Page 1, lines 10 - 11:
Delete "that is actively engaged in a qualified
trade or business"
Insert "and that meets the active business
requirement in 26 U.S.C. 1202(e) as that subsection
read on January 1, 2012"
Page 1, line 14:
Delete "AS 46.20.012"
Insert "AS 43.20.012"
Page 2, lines 5 - 15:
Delete all material.
Renumber the following paragraph accordingly.
Page 2, following line 18:
Insert a new paragraph to read:
"(1) "Alaska corporation" means a
corporation that has been incorporated in the state or
is authorized to do business in the state;"
Page 2, lines 19 - 20:
Delete "(1) "aggregate gross assets," "parent-
subsidiary controlled group," "qualified small
business," and "qualified trade or business""
Insert "(2) "parent-subsidiary controlled group"
and "qualified small business""
Page 2, line 21:
Delete ";"
Insert "."
Page 2, lines 22 - 27:
Delete all material and insert:
"* Sec. 3. AS 43.20.012 is repealed and reenacted
to read:
Sec. 43.20.012. Limitation on application of
chapter; credits. The tax imposed by this chapter does
not apply to individuals or to fiduciaries. However,
an individual may file a return under this chapter to
receive a tax credit under AS 43.20.013.
* Sec. 4. Sections 1 and 2 of this Act take effect
July 1, 2012.
* Sec. 5. Section 3 of this Act takes effect
July 1, 2023."
CHAIR OLSON objected for the purpose of discussion.
3:51:52 PM
REPRESENTATIVE COSTELLO explained that page 1 lines 1-4 of the
Amendment 1 would incorporate subsection (e) of Internal Revenue
Code (IRC) section 1202 that requires at least 80 percent of a
qualifying business' assets must be used in the active conduct
of the business. The next change on page 1, lines 6-8 corrects
a typographical error. She then referred to page 1, lines 10-
11, which would remove the requirement that qualifying
businesses file a report documenting their eligibility for the
exemption.
3:52:14 PM
REPRESENTATIVE HOLMES related her understanding that this change
is being made since the corporation has previously filed the
information with the federal government and this would be
duplicative.
REPRESENTATIVE COSTELLO agreed.
3:52:23 PM
REPRESENTATIVE COSTELLO referred to page 1, lines 15-18, which
removes the requirement that a qualifying business be
headquartered in Alaska to avoid potential violations of the
Equal Protection and Interstate Commerce Clause of the U.S.
Constitution. The bill originally required the business to be
headquartered in Alaska, but that provision was changed to
require the work be conducted in Alaska. The next changes would
delete definitions no longer used in the statute and corrects
the punctuation. Finally, a sunset provision was added to the
bill so the program would sunset July 1, 2023.
3:53:21 PM
CHAIR OLSON removed his objection. There being no father
objection, Amendment 1 was adopted.
3:53:55 PM
JOSH WALTON, Staff, Representative Mia Costello, Alaska State
Legislature, stated that HB 252 would provide state corporate
tax exemptions for qualifying small businesses as the term is
defined in IRC code section 1202. That section is meant to
encourage investment, in particular, venture capital investment
targeted at startup companies involved in research and
development, innovation, intellectual property, and software
development. These are the sorts of companies that represent a
very fast growing sector. He offered that if the state wishes
to diversify its economy, one way is to branch out into sectors
that will grow quickly. Thus this bill would help to diversify
Alaska's economy. Although this bill offers an exemption it is
an exemption that will not last forever. In order to qualify
for an exemption under IRC Section 1202 a company must have less
than $50 million in aggregate gross assets. Additionally, 80
percent or more of its assets must be used in the active conduct
of the business, which he related as a significant hurdle to
overcome. However, special provisions in the tax code allow
research costs, startup costs, and experimentation costs to be
counted toward the 80 percent, which helps these companies
engaged in those activities crest that bar a little easier. He
suggested that in practice Section 1202 has been used most
effectively to encourage investment in companies that tend to be
more innovative or research-based ones.
3:57:16 PM
MR. WALTON pointed out that a number of industries are excluded.
The sponsor has received anecdotal information, such that
venture capitalists seek vehicles in which to invest. Very few
opportunities exist since the high-growth company must be a C
Corporation, which is the only corporate class structure that is
not a pass-through corporation, but one that maintains its own
corporate income tax liability. As the sponsor previously
mentioned, the state has the fifth highest corporate tax rate in
the U.S. He stated that entrepreneurs in Alaska desiring to
start an innovative driven company will look to states such as
Montana since its corporate taxes are much lower. He explained
that the companies tend to be highly mobile, with few
geographical constraints. Thus the state has an opportunity to
attract these businesses to Alaska, except for the high tax
rates.
3:59:09 PM
REPRESENTATIVE SADDLER asked for the types of industries that
are exempt under the IRC Section 1202.
MR. WALTON related that currently there are not many examples of
companies in Alaska, but nationwide the companies tend to be
technology based companies such as bio-tech, information
services, computer networking, software, and a wide variety of
companies seeking to develop new products.
4:00:36 PM
REPRESENTATIVE SADDLER asked whether the types of companies the
state is trying to attract would be companies such as Hewlett
Packard or Apple were startup companies thirty years ago.
MR. WALTON answered yes.
4:00:48 PM
MR. WALTON said that it may seem unusual that this issue is a
problem in Alaska since other types of corporate structures such
as the limited liability corporations (LLC) or S corporations,
which are pass-through entities exist. He offered that start up
activity occurs in businesses using those structures; however,
the problem is that severe limitations exist on who can invest.
He explained that the amount of capital that can be raised is
limited. Therefore, if a company seeks to be the next Google or
Apple, they must have the ability to raise a lot of capital very
quickly and to do so require lots of shareholders. He pointed
out that S Corporations are limited to 100 shareholders with one
class of stock and other companies cannot invest in the
corporation. He concluded that a corporation must be a C
Corporation in order for a venture capital firm to invest in the
company. He hesitated to suggest that Alaska is less than a
welcoming place for entrepreneurs, because it is welcoming;
however, Alaska's tax structure is not particularly friendly to
those companies that want to grow quickly and become publically-
traded companies. He characterized this bill as one that would
create a nursery for companies that will eventually outgrow
their exemptions and become taxpayers.
4:02:37 PM
REPRESENTATIVE MILLER asked whether a small company which has
not incorporated could qualify under the bill.
MR. WALTON answered that this exemption relates only to C
Corporations.
REPRESENTATIVE MILLER asked whether a preponderance of work
would be performed in Alaska under the bill.
MR. WALTON answered that a C Corporation's corporate tax
liability depends on the business activities performed in
Alaska. If a corporation carries out all of their activities
and meets the overall criteria for the exemption, then all of
their activities would be exempted. He explained that
originally the bill required companies to be headquartered in
Alaska, but the Department of Law advised that doing so violated
the Interstate Commerce Clause and Equal Protection Clauses of
the U.S. Constitution so those provisions were removed. Thus a
1202 C Corporation headquartered anywhere would be eligible for
activities in Alaska.
4:04:33 PM
CHAIR OLSON recalled that in the past six years the committee
has had bills similar to this with the commonality that Alaska
has been working to be competitive with other states that
currently have advantages over Alaska. He inquired as to
whether he was aware of any other states beyond Montana that
Alaska has competing with who would be affected by this bill.
MR. WALTON did not recall who is on bottom of the list in terms
of income tax. He recalled that this would be the only program
in the country of this type. In response to Chair Olson, he
agreed that Alaska would be considered innovative. Alaska would
move from being the fifth least encouraging environment to being
tied for first place if not outright becoming first place in the
nation.
4:06:29 PM
TYLER ARNOLD, Founder, Tyler Systems; Chief Executive Officer,
SimplySocial, Inc., stated that SimplySocial, Inc. provides
social media services. He explained that he is a 19-year old
entrepreneur born and raised in Anchorage, Alaska. He stated
that he was 16 years old when he started his first information
technology company, Tyler Systems, which won the SBA young
entrepreneur of the year award in 2011. His current startup,
SimplySocial, Inc. brings together a global team all a part of a
1202 C Corporation founded in Alaska. The C Corporation status
allows his company to be more attractive to investors and is
geared towards international business. It allows the company to
be a high growth company. They may be global, but act local.
He suggested that Alaska has one of the highest corporate income
tax rates in the country. This bill, HB 252, would remove the
burden but would strengthen the global competitiveness. He said
he is currently in Romania working with the team until we all
come to Alaska in April to launch our project publically the end
of April. He hoped to show the global co-founders that Alaska
plays to our advantage and is an easy place for startups to call
home. He thanked the committee. In response to a question
about the good reception, he answered that he is using Skype.
4:08:38 PM
REPRESENTATIVE SADDLER asked if he had considered going to
anyplace else in the nation for either of his businesses.
MR. ARNOLD answered no. When they founded their company last
October, the founders understood Alaska could be one of the
first to consider the IRC Section 1202 exemption. He related
that the legislators and venture capitalists in Silicon Valley
were not considering the exemption. He explained that they did
not look at any other states due to the exciting prospects of
this bill. In response to a question, Mr. Arnold advised that
Romania is 11 hours ahead of Alaska's time zone.
4:09:56 PM
JOHNATHAN BITTNER, Director, Business and Economic Development;
Anchorage Economic Development Corporation (AEDC) expressed
support for HB 252. The company does a lot of local and
national outreach to generate support for Anchorage and Alaska
as a place to do business and to incorporate a business. The
competition is very fierce among other states who are working to
provide incentives to attempt to attract businesses. Anchorage
is a good place to do business, but tools like HB 252 are
crucial in terms of placing Alaska at the forefront. He
reiterated AEDC's support for the bill.
ALLAN R. JOHNSTON, Chief Encouragement Officer, Team Network,
Inc. stated that he has been with Wedbush Securities Inc. for 35
years and regional manager for most of that time. He said that
he is now transitioning into his encore career. He has raised
three children in Alaska. He offered that his focus has been to
assist youth in creating and focusing on jobs in Alaska. He has
been involved in the Alaska Business Plan, which is a
competitive and cooperative effort between the University of
Alaska (UAA), Alaska Pacific University (APU), and University of
Alaska Fairbanks (UAF). The focus has been to break barriers
and work collectively, to help students think globally, and to
heighten their aspirations of what they can accomplish. He
helps them identify problems and be part of the solution in
Alaska instead of using a business model developed outside
Alaska. He has observed the opportunities and quality of living
in Alaska. He has also viewed HB 252 as a vehicle and means to
attract people who love outdoors an opportunity to move their
small companies, children, and families to Alaska - a state that
has a quality of life second to none. This bill has
specifically been geared to use a C Corporation instead of an
LLC or S Corporation.
MR. JOHNSTON offered his belief that HB 252 is also geared for
those seeking national and international markets whose
competitor is not just across the street. This gets back to the
whole idea of raising aspirations of what can happen in Alaska.
He recalled Irv Long, who designed the thermal tubes on the
Trans-Alaska Pipeline System (TAPS). He mentioned that two-
thirds of the wellspring drills in Vermont siphoning and heat
tubes and many of the initial patents were filed by people
including Joe Balash. He also pointed out Ed Clinton, Dowland-
Bach, Inc., with respect to his work on control valves. He
emphasized that Alaska should have been exporting intellectual
property for years. He offered his belief that HB 252 could
help bring national and international interest due to its
quality of life and as a state that is also focused on national
and international opportunities. He shared that he is very
passionate about this and recognizes HB 252 as a tool, noting
several tools are being developed. He hoped Alaska could train
people to use these tools. He said he is so impressed with
Jonathan Bittner's startup for software companies, noting that
32 people representing six startup software companies
characterized the startup process as the most exciting process.
He expressed excitement over what has been happening in in
Alaska in the past year. He offered his belief that HB 252
could help create a phenomenal opportunity for Alaska at little
to no cost or perhaps even a negative cost.
4:16:15 PM
CHAIR OLSON, after first determining no one else wished to
testify, closed public testimony on HB 252.
REPRESENTATIVE JOHNSON moved to report HB 252, as amended out of
committee with individual recommendations and the accompanying
fiscal notes. There being no objection, CSHB 252(L&C) was
reported from the House Labor & Commerce Standing Committee.