Legislature(1999 - 2000)
04/22/1999 05:12 PM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 58 - OIL & GAS AUDITS Number 0068 CHAIRMAN WHITAKER announced that the first order of business is House Bill No. 58, "An Act relating to certain audits regarding oil and gas royalty and net profits and to audits regarding costs relating to exploration incentive credits and oil and gas exploration licenses; and providing for an effective date." Number 0124 KEVIN BANKS, Petroleum Market Analyst, Department of Natural Resources, testified via teleconference from Anchorage. He reminded the committee that HB 58 is somewhat of a housekeeping action that may contribute to some savings and also provide each department with a certain specialization when it comes to acquiring revenues. CHAIRMAN WHITAKER interjected. He asked Mr. Banks if he would give the committee a quick synopsis of what HB 58 does. MR. BANKS stated that HB 58 transfers the authority to conduct audits on royalty revenues from the Department of Revenue (DOR) to the Department of Natural Resources (DNR). Along with that authority comes the responsibility of those who are handling the information acquired in a royalty audit to maintain the confidentiality of that information. The same kind of penalty that is now imposed on the DOR is transferred to the DNR as part of HB 58. In addition there is a fiscal note that simply moves the staffing requirements from the DOR to the DNR. DNR feels that there is a certain level of expertise that each department brings to the table; the DOR is the taxing authority and collects revenues on the basis of the state's rights as a sovereign state and the DNR collects royalty revenues on the basis of a contractual right that it has through the leases signed by the oil companies. He pointed out that the efficiency brought about by HB 58 should contribute to some savings over time, because the "checking the checkers" that is occurring now with the DNR reviewing the work that the DOR does is unnecessary. Number 0405 DAN DICKINSON, Director, Oil & Gas Division, Department of Revenue, testified via teleconference from Anchorage. He stated that back in 1980 when the DOR was given the function of audits on royalty revenues, essentially the tax audits and the royalty audits were very similar. Over the last two decades, through a series of court decisions and wealthy contracts, the two audits have parted ways; therefore, there are not the efficiencies that may have existed 20 years ago. He said that it makes sense to move the function from the DOR to the DNR. Number 0495 TOM WILLIAMS, Alaska Tax Counsel, BP Exploration (Alaska) Incorporated, testified via teleconference from Anchorage. He noted that he was Commission of Revenue in 1980 when the audit functions were transferred over to the DOR from the DNR. BP Exploration Incorporated recognizes the importance of the audits to the state and they know they are going to be audited regardless of which department does the auditing. They also would hope that each department would audit them just as extensively as the other one would, which means they have no reason to savor being audited by one department or the other and consequently no position on who should to the auditing. MR. WILLIAMS continued. He stated that royalty and net profit audits are always going to involve scrutiny of their oil sale contracts and other sensitive information on how they market their oil. The audit information and material developed by the state auditors must be kept confidential, not only because those things would be valuable to the competitor, but also because federal and state anti-trust laws make it illegal to share or disclose competitive marketing information with the competitor. The disclosure doesn't have to be directly to a competitor for it to be illegal; anti-trust laws may be violated simply by disclosing information to third party who in turn discloses it to a competitor. Under the Public Records Act all information and material in the position of the state is public unless there is a specific law stating otherwise. This has not been an issue with the DOR doing the audits, because the same confidentiality laws for taxes also apply to audits. He added that the DOR's concern is that the same confidentiality which now exists with the DOR will continue to exists with the DNR. He noted that DOR has closely examined the confidentiality provisions in HB 58 and the present version appears to provide the same level of protection that currently exists with the DOR, and this satisfies DOR's concern. He stated that the DOR has no reason to oppose HB 58. REPRESENTATIVE PHILLIPS wondered if Mr. Williams thinks any changes need to be made in the DNR if the transfer occurs or would the confidentiality structure that is currently in DOR be adequate. Number 0744 MR. WILLIAMS indicated that there is a provision in HB 58 that calls for the materials to be held confidential by the DNR auditors under the same terms that currently apply to the DOR auditors. In addition there is the same criminal penalty for those who violate that confidentiality. He said that confidentiality is very serious; it is the lynch pin to making the tax work. He feels that it is necessary and appropriate to have the criminal penalty for those who do not take it seriously enough. REPRESENTATIVE OGAN asked Mr. Williams what the thinking was in 1980 when the audit functions were transferred from DNR to DOR. MR. WILLIAMS explained that it seemed at the time that the issues with regards to the value of oil or gas would be basically the same whether the question was being asked in the context of tax or in the context of royalty; therefore, it made sense to have one set of auditors go out and look at the documents and provide an answer to the question, Have they reported the right value? He pointed out that in June of 1977, Prudhoe Bay started production and the trans-Alaska pipeline started operating. At the end of July the first royalty reports and tax payments had to be made and the payments were in fact made by the oil companies. In August or September of that year, on the basis of the first reports, the North Slope Royalty Case was filed by the state of Alaska against the Prudhoe Bay owners. When that lawsuit was filed, the oil companies took the position that tax auditors could come in, because tax isn't a royalty, but the royalty auditors couldn't come in. If the state wanted to find out the details, the position of the attorneys in the litigation was "We'll see you in court. You file a motion for discovery and we'll produce it in due course." The DOR could go into the companies and see the information and then report to DNR what they saw going on. It was a way to keep DNR informed, instead of being in the dark until the formal discovery process and litigation showed them what was going on. Number 0977 REPRESENTATIVE KEMPLEN wondered how many audits the DOR performs presently on BP Exploration Inc. MR. WILLIAMS replied that they are audited every year for production tax, which they pay monthly. He said that they report and pay royalties on a month to month basis. Every year they are audited for royalty returns and income tax. There is not a single tax period since the start of Prudhoe Bay production, in 1977, that has not been audited or is in the process of being audited by the state. Number 1050 REPRESENTATIVE HARRIS made a motion to move HB 58 with individual recommendation and attached fiscal notes. There being no objection, HB 58 was moved from the House Special Committee on Oil and Gas.
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