04/13/2009 01:00 PM House RESOURCES

HB 217-TAX ON GAS FOR IN STATE MANUFACTURING                                                                                  
                                                                                                                              
1:38:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NEUMAN announced  that the  next order  of business  is                                                               
HOUSE BILL  NO. 217, "An  Act relating  to the tax  applicable to                                                               
the  production of  natural  gas used  in the  state  as fuel  or                                                               
feedstock in producing a manufactured end product."                                                                             
                                                                                                                                
The committee took an at-ease from 1:38 p.m. to 1:39 p.m.                                                                       
                                                                                                                                
[Due  to technical  difficulties the  audio for  the time  period                                                               
from 1:39 p.m. to 1:41 p.m. is unavailable.]                                                                                    
                                                                                                                                
1:40:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON moved  Amendment 1,  labeled 26-LS0816\A.1,                                                               
Bullock, 4/13/09, as follows:                                                                                                   
                                                                                                                                
     Page 1, following line 8:                                                                                                  
          Insert a new bill section to read:                                                                                    
       "* Sec. 2. AS 43.55.900 is amended by adding a new                                                                   
     paragraph to read:                                                                                                         
               (25)  "manufacturing process" means a                                                                            
       process that involves a chemical transformation of                                                                       
       feedstock gas or combination of feedstock gas with                                                                       
     other components."                                                                                                         
                                                                                                                                
CO-CHAIR NEUMAN objected for purpose of discussion.                                                                             
                                                                                                                                
1:41:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG asked what AS 43.55.900 is related to.                                                                
                                                                                                                                
CO-CHAIR NEUMAN said  he believes it has to do  with the in-state                                                               
five percent production tax on oil and gas.                                                                                     
                                                                                                                                
DONALD BULLOCK  JR., Legislative  Counsel, Legislative  Legal and                                                               
Research  Services,  Legislative  Affairs  Agency,  Alaska  State                                                               
Legislature,  first pointed  out  that the  phrase  "used in  the                                                               
state" in  HB 217 is important  because there is a  tax cap under                                                               
the production  tax in AS  43.55.0110, subsection (o),  that caps                                                               
gas that is produced outside of  Cook Inlet and used in the state                                                               
and the cap  is equal to the  tax cap that is on  Cook Inlet gas.                                                               
He  said 43.55.900  is the  section  of the  production tax  that                                                               
includes  all the  definitions for  that chapter.   He  explained                                                               
that HB  217 and  Amendment 1 amend  the definition  in paragraph                                                               
(24)  and  add  the  definition   for  manufacturing  process  in                                                               
paragraph (25).                                                                                                                 
                                                                                                                                
1:42:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  understood  that under  Amendment  1  the                                                               
conversion  of gas  to fertilizer  or the  petrochemical industry                                                               
producing   a   different   product   would   be   considered   a                                                               
manufacturing  process, whereas  simply  chilling and  liquefying                                                               
the gas or  simply stripping out the propane  without changing it                                                               
would not be considered a manufacturing process.                                                                                
                                                                                                                                
CO-CHAIR  NEUMAN responded  that his  intent  with HB  217 is  to                                                               
ensure there is added value.   Pulling out propanes, butanes, and                                                               
ethanes  from natural  gas would  be  an added  value because  it                                                               
would  be  creating  jobs  and  industry  within  the  state  and                                                               
therefore  it   would  be   considered  manufacturing.     Simply                                                               
liquefying natural gas would not be included.                                                                                   
                                                                                                                                
1:44:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  he  is unsure  that this  definition                                                               
qualifies for Representative Neuman's intent.                                                                                   
                                                                                                                                
CO-CHAIR NEUMAN replied that HB 217  will be held so that work in                                                               
this regard can continue.                                                                                                       
                                                                                                                                
MR. BULLOCK  said he reads  the description of  the manufacturing                                                               
process in  Amendment 1 as  meaning that something is  coming out                                                               
that  is  different than  what  went  in.   If  the  gas is  just                                                               
liquefied, it is the same thing  that went in that is coming out.                                                               
If it is  combined with other chemicals to produce  a product, or                                                               
if is used  as the substance for something  like fertilizer, then                                                               
that is the manufacturing process that has changed the gas.                                                                     
                                                                                                                                
CO-CHAIR  NEUMAN removed  his objection  to Amendment  1.   There                                                               
being no further objection, Amendment 1 was passed.                                                                             
                                                                                                                                
1:45:31 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NEUMAN said  his intent  in HB  217 is  to ensure  more                                                               
added value processing  of Alaska's natural gas.   The processing                                                               
of gas to liquids in Alaska  by the military would fall under the                                                               
definition of  used in  state and  would fall  under a  5 percent                                                               
production tax.  This was expanded  to encompass all of the state                                                               
when Alaska's  Clear and  Equitable Share  (ACES) became  law, he                                                               
continued.  Under  current law, in-state use only  applies to the                                                               
generation  of electricity  or  home heating,  and  HB 217  would                                                               
expand this  to include the  use of gas  as fuel or  feedstock in                                                               
manufacturing.   Creating more added value  through manufacturing                                                               
would  expand the  economic opportunities  to the  state for  its                                                               
natural gas, as  opposed to just exporting it.   He noted that he                                                               
will hold the bill because he  is unsure whether the 5 percent is                                                               
enough  incentive and  there may  be something  else that  can be                                                               
added.                                                                                                                          
                                                                                                                                
REPRESENTATIVE   GUTTENBERG  cautioned   that   there  might   be                                                               
processes of  using the gas  that people in Alaska  are currently                                                               
unaware of because there is  presently so little of this industry                                                               
in the state, and this  limited knowledge could result in leaving                                                               
the state on the short end.                                                                                                     
                                                                                                                                
1:48:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  inquired  whether taxes  on  natural  gas                                                               
liquids (NGLs) are oil taxes or gas taxes.                                                                                      
                                                                                                                                
MR. BULLOCK said he is unsure.                                                                                                  
                                                                                                                                
KEVIN  BANKS, Director,  Division  of Oil  &  Gas, Department  of                                                               
Natural Resources, deferred to the Department of Revenue.                                                                       
                                                                                                                                
LENNIE   DEES,   Audit   Master,  Tax-Production   Audit   Group,                                                               
Department of  Revenue, stated that,  under statute,  natural gas                                                               
liquids are taxed as oil.                                                                                                       
                                                                                                                                
CO-CHAIR NEUMAN held over HB 217.                                                                                               
                                                                                                                              
1:51:13 PM