Legislature(1999 - 2000)
02/17/2000 10:12 AM 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 307-OIL AND GAS CORPORATE TAX ACCOUNTING Number 1397 CHAIRMAN WHITAKER announced that the next order of business would be HOUSE BILL NO. 307, "An Act establishing an oil and gas corporate income tax and making conforming amendments; and amending the tax on corporations levied under the Alaska Net Income Tax Act to eliminate the state corporate income tax on taxable income of less than $10,000; and providing for an effective date." [The committee took a five minute at-ease; the meeting was called back to order at 11:30 a.m.] Number 1273 REPRESENTATIVE ERIC CROFT, Alaska State Legislature, sponsor of HB 307, explained that the basic question addressed in the bill is whether Alaska's corporate income tax structure is fair and accurate for all. The bill presumes that the answer is no. It proposes two changes: taking to zero some of the taxes on the smallest corporations, to encourage small business development; and closing a loophole that allows the largest oil and gas corporations to pay less than the established rate of 9.4 percent. The loophole was related to separate accounting, which has to do with taxing businesses that operate in many states and how to apportion the part of the total profit that comes to any one state [in this case, Alaska]. REPRESENTATIVE CROFT described another accounting method - known as formula apportionment - which says that one estimates profit by considering three factors: property, sales and payroll. One can estimate from that basis the taxable income for one state, a percentage of the corporation's nationwide or worldwide profit. Formula apportionment works fairly well for retail industries, and it is the way Alaska began taxing oil development in the late 1970s. It later became clear, however, that the formula was not going to work very accurately for the oil industry. The result of using the formula was a dramatic underestimate of the profit made. Number 0923 REPRESENTATIVE CROFT explained that the alternative to formula apportionment is to treat Alaska like a separate corporate entity, with separate accounting; that is the model adopted in the late 1970s and applied in Alaska for three years, from 1978 to 1981. It is also the method used in other oil-producing states, and it is the way in which the federal government assesses federal income tax on multi-national corporations. REPRESENTATIVE CROFT recalled that after passage of separate accounting in 1978, the oil companies sued, challenging separate accounting on constitutional grounds. If the oil companies had won that suit, there would have been a very large tax refund due them from the state, and this was part of reason that separate accounting was repealed. In 1982, the state and the oil companies agreed to use a modified apportionment. That agreement was part of a potential settlement of the lawsuit. In place of separate accounting, the state and the oil companies tweaked some of the factors in formula apportionment. The suit continued. In 1985, Alaska's Supreme Court said there was nothing wrong with separate accounting. An appeal to the United States Supreme Court was rejected; so that, in legal terms, is the end of the road. Separate accounting was approved as an appropriate method. Number 0741 REPRESENTATIVE CROFT referred to a sheet of figures prepared by Dan Dickinson of the Department of Revenue, which detailed the difference between the amount of money the state would have received under separate accounting and the actual amount received under the modified apportionment. In every year since separate accounting was repealed, he noted, the state would have received more from separate accounting than it actually received from modified apportionment. The total for those years, 1982-1997, was $4.6 billion of lost revenue to the state. REPRESENTATIVE CROFT stressed that separate accounting was instituted in the first place because it makes sense, and because it is appropriate to use as an accuracy measure. Proponents of HB 307 want an accurate statement of the actual profit made and an appropriate tax on what actually was made in Alaska. Number 0412 JOHN R. MESSENGER, Attorney at Law, Preston Gates & Ellis, testified from Anchorage by teleconference. He began by summarizing his experience with separate accounting and related issues, which began when he was deputy commissioner of the Department of Revenue during the time the legislature considered separate accounting, in the late 1970s. He was a member of the legal team that defended the state's separate accounting tax bill. Since that time, he has been working with Department of Revenue and Department of Law with respect to defending audit assessments, including those with related to separate accounting. He recently gave testimony at the request of the Joint Special Committee on Mergers with respect to separate accounting. Representative Croft had asked him to testify on HB 307, he explained, and to give his perspective on the legal issues. MR. MESSENGER said the legislature is not starting from scratch on this issue. Voluminous legislative history has been compiled and indexed regarding separate accounting. TAPE 00-13, SIDE A Number 0013 MR. MESSENGER explained that when separate accounting was first enacted in 1978, there had been no experience with the tax, and there were some misgivings. Today, however, there is a track record with respect to this tax. In addition, those reviewing it have the results of litigation regarding its constitutionality. In summation, this tax is a known quantity that has been examined and tested in minute detail over the years. MR. MESSENGER reminded members that separate accounting was enacted because the legislature determined that the formula apportionment method did not accurately represent the level of business activity in the state by the oil companies; separate accounting was a more accurate way of measuring the oil companies' income in the state. The change to separate accounting was to correct that inequity, to put the oil industry on an equal footing with other corporations doing business in the state, so that all corporations would pay something close to the 9.4 effective tax rate. MR. MESSENGER said the [separate accounting] tax was not repealed in 1981 because the state was dissatisfied with the tax or felt it was flawed or inaccurately reflected the industry activities or profits in the state. Rather, it was repealed because the litigation that was pending at that time put a cloud over the tax; the potential contingent liability of $2 billion was so large that any chance that the tax might be struck down was intolerable. That litigation was ultimately resolved in the state's favor. MR. MESSENGER pointed out that with respect to the legal issues, this legislature is in a unique position, different from that of the legislatures in 1978 and 1981. Legislators now are considering a tax that already has been declared constitutional. Every court - the Alaska Superior Court, the Alaska Supreme Court and the United States Supreme Court - has ruled in the State of Alaska's favor. Those decisions have not been overruled, and no doubt has been cast on their validity. Court cases since then have reaffirmed the grounds on which separate accounting was upheld. The safest course, from a legal standpoint, would be to adopt a tax as close as possible to the one that was reviewed [by the courts]. CHAIRMAN WHITAKER and REPRESENTATIVE CROFT agreed to defer additional testimony until later because of the limited time available. [HB 307 was held over.]
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