Legislature(2011 - 2012)BARNES 124
02/01/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB298 | |
| HB276 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 298 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 276 | TELECONFERENCED | |
HB 298-EXEMPTIONS FROM MINING TAX
1:05:31 PM
CO-CHAIR FEIGE announced that the first order of business would
be HOUSE BILL NO. 298, "An Act exempting sand and gravel and
marketable earth mining operations from the mining license tax;
and providing for an effective date."
CO-CHAIR SEATON, prime sponsor, explained that HB 298 would
exempt sand, gravel, and marketable earth mining operations from
the mining license tax. This extremely cumbersome tax is based
on the profits of the end product that is made from the sand and
gravel. Many operations have numerous end products, such as
cinderblock or asphalt, and each one of those products must be
tracked to figure out the profit margin on the sand and gravel
that went into it. Another way that the tax is cumbersome is
that the operators are required to file a consolidated single
form for their pits but under the mining license tax they are
also required to do the calculation based on the entire mining
operation. Therefore, it is a complex set of recording and ways
in which the revenues and profits are accounted for.
1:07:37 PM
CO-CHAIR SEATON reported that the fiscal impact of the mining
license tax is very small. For example, in 2011 the [Department
of Revenue (DOR)] received 182 mining license returns from sand
and gravel operators, but only 17 of those paid any tax. The
reason no tax was paid is because net profits below $40,000 are
excluded from the tax. He reminded members about a previously
considered re-write of mining tax laws in which the deduction,
or the point at which taxes had to be paid, would have been
increased two and one-half times to $100,000. He said HB 298
does not go into any other mining operations such as placer or
hard rock, it only deals with sand and gravel and marketable
earth. By excluding all sand and gravel operations from the
mining license tax, HB 298 would provide a much more direct way
of getting to the same thing that was trying to be accomplished
by raising the exclusion.
1:09:12 PM
CO-CHAIR SEATON said the other thing about the fiscal impact is
that it has only raised about $206,000 to $320,000 [annually] in
the last four or five years, but it costs the Department of
Revenue about $150,000 [annually] to administer the program. In
one way it could be looked at as a nuisance tax because it
raises so little money, but in actuality some of the larger sand
and gravel operators sell 80 percent of their product to public
works projects, so 80 percent of the tax is being paid for in
public works projects. Generally, operators take their costs of
doing sand and gravel, including this tax, and put on a 20
percent administrative fee, so the state ends up paying a huge
portion of this tax through its public works projects, plus the
administrative fee for calculating the tax, and then the audits
that are required. He said he thinks that calculations for
public works projects would show that the state is losing money
by this tax. Additionally, the tax is very burdensome on both
small and large businesses. He related that some of the written
testimony states that in some cases up to 200 hours of work goes
into just maintaining the records and going through audits.
1:11:27 PM
CO-CHAIR SEATON further noted that folks from Southeast Alaska
have said that all of that region's gravel comes from crushed
quarry rock and not sand and gravel mining. Therefore, he has
an amendment to extend the definition to quarry rock, sand and
gravel. Drawing attention to the Department of Revenue
calculations in the committee packets, he pointed out that the
quarry rock was included in those calculations. He said that
quarry rock gravel also includes the Alaska Peninsula.
1:13:09 PM
REPRESENTATIVE KAWASAKI inquired whether HB 298 would affect
valuable metals or other minerals outside of sand and gravel or
quarry rock.
CO-CHAIR SEATON replied no, the bill strictly deals with sand
and gravel and marketable earth and, if the amendment is
adopted, it will also deal with quarry rock. He said those are
exclusive of any metallic minerals or other extractives.
REPRESENTATIVE KAWASAKI asked whether marketable earth is
defined in the bill or in some other statute.
CO-CHAIR SEATON responded that marketable earth is peat and
topsoil. He offered to get back to the committee with the
definition.
1:14:10 PM
REPRESENTATIVE FOSTER said HB 298 sounds like a good proposal,
but asked whether any department jobs would be eliminated
because of the bill.
CO-CHAIR SEATON answered that the Department of Revenue's
auditors would be much more profitably used by the state for
auditing larger operations that produce more revenue to the
state. It is not that those auditors would go to oil and gas,
he said, rather their expertise is in auditing the mineral
industry and that is where they would be more productively used.
1:15:20 PM
REPRESENTATIVE HERRON inquired as to how many tons or yards of
sand and gravel are being talked about.
CO-CHAIR SEATON responded that back in the 1970s he was amazed
to find out that sand and gravel was the state's largest
extractive industry. He clarified that HB 298 only deals with
the mining license tax and would not affect the royalties that
are paid by operators taking sand and gravel off of state land.
While he did not have the tonnage, he said the mining license
tax is calculated on a profit basis, not a tonnage basis. He
offered to provide more information if that was desired.
REPRESENTATIVE HERRON said he would just like for it to be on
record that it is the largest extracted product in Alaska.
CO-CHAIR SEATON added that when he was looking at this for any
unintended consequences, he had the [Department of Revenue] look
at all municipalities that have a severance or other tax. Of
the seven boroughs or municipalities in the state that have a
severance tax, none of those taxes are based on the mining
license tax.
CO-CHAIR FEIGE opened public testimony on HB 298.
1:18:12 PM
WES VANDERMARTEN, Vice President, General Manager, Anchorage
Sand & Gravel Co., Inc., thanked the sponsor for introducing HB
298. He said Anchorage Sand & Gravel is a vertical integrated
company that mines sand and gravel, and gravel-related products,
such as concrete, asphalt, aggregates, block, pre-cast concrete,
cement, and more. Doing business in Alaska since 1938, Alaska
Sand & Gravel's products are used in a wide variety of products
in the greater Anchorage area as well as over the state from
residential to military and state projects. He outlined the
reasons for why Alaska Sand & Gravel is in favor of passing HB
298. The amount of revenue that the state collects on this tax
is less than, or at best equal to, what it costs the state to
collect it and therefore it is a neutral tax at best. Over the
years the state has performed many audits on sand and gravel,
with some individual audits lasting over two years. It has been
a great strain on the state's auditing department with little
results to show for it. The tax is burdensome because it
requires a great deal of time to generate the necessary
information for filing the tax. The current think of the DOR
auditing division is that it is based on a fair market price and
should be determined on each product to help calculate revenue.
Anchorage Sand & Gravel produces 20-30 different sand and gravel
products, so gathering the information is very time consuming
and, if audited, the time and expense grow significantly.
Anchorage Sand & Gravel's last audit took 18 months to complete
and the cost was about $50,000 to compile the information and
attend meetings.
1:20:49 PM
MR. VANDERMARTEN maintained that the mining tax as it relates to
sand and gravel is very ambiguous and inconsistent. Other
mining operations, such as gold, silver, zinc, and coal, are
indexed and the values are very easily defined and very
traceable, but that is not the case for sand and gravel. The
various gravel producers in the state have very different
processes and markets that they deal in, thus it is difficult to
determine a fair market price. For example, Anchorage Sand &
Gravel is strictly a supply company, so all it does is sell to
other contractors, while other producers tend to lean toward
construction and their products are used on their own projects.
So, coming up with a fair market value that is fair and easy to
determine is the root of the problem and the auditors and
producers struggle with making it a consistent tax across the
board. The amount of tax paid by one producer may vary greatly
on the same product that another producer might pay.
MR. VANDERMARTEN pointed out that governments are the customers
for the majority of Anchorage Sand & Gravel's products; so much
of the cost of the tax is just passed back to the state.
Summarizing, he said the mining license tax is a non-productive
tax, it is burdensome and time consuming for both the producer
and the state auditing department, and it is inconsistent
because there is no market index. For these reasons, Anchorage
Sand & Gravel feels that sand and gravel should be exempted from
the mining license tax statute.
1:22:43 PM
CO-CHAIR SEATON asked whether Mr. Vandermarten has any feelings
about amending the bill to include quarried rock.
MR. VANDERMARTEN replied that he does not think it will have any
effect. In further response, he said Anchorage Sand & Gravel
does not do quarry rock. He understood that the production of
quarry rock is very limited in the state.
1:23:40 PM
JULIE OLSON, CPA, Controller, Secon, noted that Secon is a
subsidiary of Colaska. She said she was an auditor in public
accounting for 11 years and has now worked for SECON for a year
and a half. The volume and amount of effort going into
preparing for the audit that Secon has been undergoing has been
overwhelming, she continued. Secon has spent about 200 hours
preparing for the audit. While the auditors have been great and
are trying to do their job to make sure that Secon is complying
with the tax return requirements, it has been really difficult
to provide the auditors with what they need and in the right
format. She stressed the difficulty of complying with the audit
requirements and how burdensome that has been. She said she
fully supports HB 298 and thanked the sponsor.
1:25:02 PM
MS. OLSON, in response to Co-Chair Feige, said she is the
controller for [Secon] in Juneau and that there are four other
accountants who do various levels of activities, but the
majority of the information flows through her. In further
response to Co-Chair Feige and Representative Gardner, she
confirmed that she would have no difficulty in re-utilizing
those other people in other areas and that HB 298 would not put
anyone out of work.
1:26:19 PM
CHERYL SHAFER, Owner, Dibble Creek Rock, Ltd., stated that hers
is a small, family run sand and gravel and ready mix business on
the lower Kenai Peninsula. She said her company also finds it
burdensome to apply the mining license tax to its sand and
gravel operations, which is a basic industry with a low value
product. Her company has experienced the same difficulties as
stated in written and oral testimony by the big companies.
Dibble Creek Rock owns and leases multiple gravel sites and it
is an accounting nightmare to try to separate the company's
products from the several different sources and that are used
for different products. She explained that she has to file
double mining tax returns on all of her company's pits simply
because the title of the property is held in a different name,
which is her husband and herself, than their company name which
is Dibble Creek Rock, Ltd., the operator of the pits.
1:27:32 PM
MS. SHAFER said her company is also currently being audited by
the Department of Revenue for three years of mining tax returns
and this audit has been going on since 2009. It is just a two-
person office and she is the one who has been spending time
trying to accommodate all of the information that the Department
of Revenue has been asking for. Both she and the department
find it difficult to separate out the company's mining
activities from its integrated activities. More time is
actually spent by trying to comply and file a correct mining tax
report than it does for her to figure out her company's federal
corporate tax. Dibble Creek Rock feels that taxing such a basic
industry in such a complex way hurts the economic outlook of the
state because it drives up the price on fundamental products
that everyone needs. She said her company strongly supports
passing HB 298 to exempt sand and gravel and marketable earth
mining operations from the mining tax law. She thanked the
sponsor for bringing this issue to the committee's attention.
1:29:28 PM
MARC COTTINI, Owner, Quest Engineering Inc., testified that his
company got involved in the gravel business and representing
clients about six years ago when the Matanuska-Susitna Borough
started regulating extraction sites in the borough. Through
that process, his firm learned of the requirement of the mining
license tax. The company went through a long process with its
clients and with two CPAs and during that process the company
even had to go through back audits. Quest Engineering found the
auditors in Anchorage very helpful and kind, but they were doing
their job thoroughly. His company's clients are small gravel
pit operators and because of the $40,000 exemption none of them
owed any taxes, but they had to fill out the forms. He said the
audits were a heavy and expensive burden of time and money.
Over the last six years, none of his clients in approximately
seven different locations have had to pay any tax. He urged the
committee to pass HB 298 because the tax is an undue burden and
a hardship. If nothing else, the main thing is exempting small
firms from the paperwork. Since they are already exempt from
paying any tax it would be nice to be exempt from the paperwork.
1:31:50 PM
MR. COTTINI, regarding how much burden is involved, said he
spends about eight hours once a year for every site his company
is at; currently, Quest Engineering is actively processing at
three sites. Additionally, he spends another day answering
questions from the individuals, trusts, landowners, and
businesses that receive royalties from Quest to make sure that
they get the information correct because the auditors compare
the forms submitted by Flintstone Inc. - Quest's gravel
screening business - to the forms sent in by the folks receiving
the royalties. If there is a mismatch there is an audit.
Therefore, he sets aside one full week every winter to process
this paperwork. If he does not process this paperwork he will
not get a mining license to operate the following summer, nor
will the sites where his company works at.
MR. COTTINI closed his testimony by noting that after he spends
his time putting together the paperwork he gives it to his CPA.
He related that his bookkeeper said Quest Engineering paid the
CPA about $400 per mining license tax return, but paid the CPA
less than $300 to do the company's federal business tax returns.
1:34:13 PM
TOM HEALY, Executive Director, Alaska Rock Products Association,
stated that his business association of sand and gravel
producers supports HB 298. He related that the applicability of
the mining license tax program to sand and gravel producers has
been a concern amongst these producers for several years. One
principle that supports exemption from a tax is whether the
effort to collect an audit tax from a certain business is out of
proportion to the tax benefit received, and this is exactly the
situation that HB 298 addresses. The mining license tax as it
applies to sand and gravel operations results in tax reporting
and tax audit procedures that are overly complex and time
consuming for both operators and Department of Revenue staff.
There is no listed market value for sand and gravel products
like there is for gold, silver, and other valuable minerals.
Sand and gravel pricing is determined by individual contracts
and bids and the same product can be priced differently by
different producers on the same day. Combined with the variety
of sand and gravel products, this results in a reporting and
audit process that is far more complex than that for a gold mine
producing one product with a known market value.
1:36:12 PM
MR. HEALY said that sand and gravel tax revenue to the state is
a relatively small portion of the total mining license revenue.
The result is an inefficient upside down situation for sand and
gravel producers - the lowest value mineral products are being
subject to the most complex reporting and audit requirements.
MR. HEALY point out that another important distinction involving
the sand and gravel industry is that its products literally form
the foundation of local, state, and federal capital projects.
Exempting sand and gravel operators from the mining license tax
would reduce the cost to government agencies for capital
projects. Finally, operators that are presently exempt from the
mining license tax must still spend time and expense to submit
to the state. This is not a cost effective use of limited
company or state resources. He reiterated his association's
support for passage of HB 298.
1:37:33 PM
JOHN MACKINNON, Executive Director, Associated General
Contractors of Alaska, explained that his construction trade
association is composed of over 650 business members. Since the
technical problems with the mining license tax have already been
discussed, he said he will instead provide a history of where
the state is today. He related that last spring some of his
member companies received audit letters that they immediately
sent to him with comments that he cannot repeat in testimony.
Looking into it, his organization realized that the present
license tax structure was poorly applied to aggregate production
in the construction industry. While it works well with minerals
and other items from the earth, the tax does not make sense for
aggregate production because of the complexity of processing.
His organization approached the Department of Revenue last
summer about the problems with the present tax as it applied to
quarry rock and sand and gravel operations and how the present
requirements could be improved. Associated General Contractors
came looking for a simpler way of calculating the tax and a
simpler audit process that would be revenue neutral; it was not
asking for an exemption.
1:39:20 PM
MR. MACKINNON explained that the Department of Revenue came back
to his organization after researching the issue and said the
simplest solution would be to exempt quarry rock and sand and
gravel operations from the requirements, rather than replacing a
tax with a tax. Both the industry and the Department of Revenue
have concluded that it is a true nuisance tax because it
produces very little revenue for the state and for the
construction industry it is expensive and very complicated to
calculate and to prove up on an audit. The majority of the
material mined and used goes into public works projects, so
government is really paying the tax bill a couple of times over.
So, what appears on the surface to be a self-serving piece of
legislation for the benefit of the construction industry is
really the result of a cooperative effort of industry, the
Department of Revenue, the administration, and now the
legislature to get rid of a nuisance tax and provide a long-term
public benefit.
1:40:43 PM
MR. MACKINNON, in response to Representative Gardner, confirmed
that it is he who can be blamed for coordinating the deluge of
letters received by committee members about this tax.
CO-CHAIR SEATON commented that this shows the usefulness of
associations of people acting together to bring an issue forward
in a coordinated manner. He said that when this problem was
presented to him he called sand and gravel operators across his
district and received the same response from every person he
contacted, yet most legislators had not heard from those
individual operators.
REPRESENTATIVE P. WILSON added that this makes her wonder how
many other laws on the books are not worth having. She said it
is joy to take something away that will make life better for
others and the state at the same time.
CO-CHAIR FEIGE closed public testimony on HB 298.
1:43:42 PM
CO-CHAIR SEATON moved that the committee adopt Amendment 1,
labeled 27-LS1263\A.1, Bullock, 1/31/12, written as follows
[original punctuation provided]:
Page 1, line 1:
Delete "sand and gravel"
Insert "quarry rock, sand and gravel,"
Page 2, line 3, following "earth,":
Insert "quarry rock,"
There being no objection to adopting Amendment 1, it was so
ordered.
1:44:43 PM
CO-CHAIR FEIGE opened committee discussion on the bill.
REPRESENTATIVE KAWASAKI observed that the fiscal note is $0 for
the Division of Mining, Land and Water, but for the Department
of Revenue in Fiscal Year 2013 and five years out it is a
$300,000 decrement while operating expenditures and fund source
are $0. He asked whether the department will be working on
other things if the mining license tax is no longer itemized.
JOHANNA BALES, Deputy Director, Anchorage Office, Tax Division,
Department of Revenue, provided a history of how the department
got to that. When sand and gravel operators in the Matanuska-
Susitna Borough were told that they needed permits the
department was contacted by the borough and the department
realized that it had several non-compliant sand and gravel
operators in the state. The department then pulled resources
from other excise tax types to do a compliance activity, which
spanned about three years. The compliance activity brought
approximately 150 new taxpayers into the fold with absolutely no
increase in revenue. Once the department realized this it began
putting those resources back on the other tax types from which
they came. The department is currently closing out the sand and
gravel audits that were mentioned during the testimony and is
putting resources into other areas.
1:46:49 PM
REPRESENTATIVE KAWASAKI inquired whether there are other taxes
that cost the state an exorbitant amount without being useful.
MS. BALES responded that the division does look at all of its
tax programs and determinations to conduct audits based on
looking at revenue. However, some taxes, such as alcohol and
cigarette taxes, are levied not just for revenue purposes. So,
the division does compliance audits in those areas hoping that
everyone is paying the tax and the intended purpose of those
taxes will be reached. She said the division is open to having
dialog to look at all of the taxes.
1:48:26 PM
REPRESENTATIVE P. WILSON said it is good to know that some taxes
are not for the purpose of actually collecting the tax. She
requested that when the department comes across something that
is a waste of time that it let legislators know so it can be
taken off the books. There is no sense in having things on the
books that are redundant or not worth the effort, she concluded.
MS. BALES replied that the aforementioned request is duly noted
and she looks forward to working with the legislature on things
like this.
REPRESENTATIVE MUNOZ agreed that onerous taxes like the mining
license tax should be brought to the legislature's attention by
the department. She said the bill and its title is very narrow
and prevents the bill from becoming a vehicle in other
committees for that possibility. She wants to be clear to
people in the mining community that the intention here is
focused on sand and gravel operations.
1:50:46 PM
CO-CHAIR SEATON pointed out that his office investigated whether
there was any large taxpayer that this would exclude, such as
building a gravel island. It turns out that building a gravel
island is using resources from a company's lease so that is not
included in the bill's provisions.
CO-CHAIR FEIGE closed discussion on HB 298.
1:51:39 PM
REPRESENTATIVE MUNOZ moved to report HB 298, as amended, out of
committee with individual recommendations and the accompanying
fiscal notes. There being no objection, CSHB 298(RES) was
reported from the House Resources Standing Committee.