Legislature(1993 - 1994)

05/07/1994 02:00 PM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
  SB 377 - STATE AGENCY FISCAL PROCEDURES                                      
  CHAIRMAN AL VEZEY called the House State Affairs Committee                   
  meeting to order at 2:32 p.m.  He announced the committee                    
  would be meeting on SB 377, "An Act relating to the                          
  limitations period for certain state taxes, and for                          
  collection of assessment of taxes due the state; relating to                 
  valuation of oil and gas under AS 43.55; adding certain                      
  definitions applicable to oil and gas production taxes; and                  
  providing for an effective date."  He noted that there was                   
  HCSSB 377(Fin) as amended.  Chairman Vezey said the primary                  
  subject he would like to take testimony on is the                            
  retroactive portions of the bill.  He indicated he believes                  
  that is the most controversial aspect that is before the                     
  Number 039                                                                   
  The first person to testify was DARREL REXWINKEL,                            
  COMMISSIONER, ALASKA DEPARTMENT OF REVENUE.  Commissioner                    
  Rexwinkel introduced John Pilkinton, Director, Division of                   
  Oil and Gas Audit, Department of Revenue.  Commissioner                      
  Rexwinkel said the department has presented extensive                        
  testimony at prior meetings on SB 377 which part of SB 185.                  
  He noted that the attorney general has provided a                            
  comprehensive document answering many questions relating to                  
  the statute of limitations provision of the bill which was                   
  in a letter dated May 2, 1994.  Commissioner Rexwinkel said                  
  the department wants the ability to determine the amount of                  
  tax owed and the ability to also collect that tax.  Without                  
  SB 377, the department cannot even determine how much tax is                 
  owed.  It is not a dispute of how much tax should be paid                    
  nor is it a dispute about whether the Department of                          
  Revenue's assessments reflect correct or incorrect                           
  application of statute.  He said they are not changing or                    
  clarifying AS 43.55 which is a severance tax statute, nor                    
  are they changing or even talking about AS 43.21 which is                    
  separate accounting.  Commissioner Rexwinkel said he is not                  
  talking about AS 43.20 which is the corporate income tax.                    
  He referred to AS 43.20 and said the federal IRS laws were                   
  basically adopted.                                                           
  COMMISSIONER REXWINKEL said SB 377 is intended to clarify                    
  the statutes.  Department of Revenue is not changing long                    
  held positions.  One statute that is specifically referenced                 
  is the collection statute.  The taxpayer doesn't have to pay                 
  the tax until the final determination of the amount of tax                   
  is made.  He said the department believes that they should                   
  have six years from that date and not the date of the                        
  initial assessment.  It could take years to determine the                    
  final assessment and the taxpayer has many options during                    
  that period of time.                                                         
  COMMISSIONER REXWINKEL referred to the audit statute.  There                 
  is currently a three year statute and sometimes the taxpayer                 
  does give a waiver on that three year statute.  He said that                 
  some taxpayers like to say that if the auditors don't                        
  discover or raise an issue within three years from the date                  
  of filing, that the department loses.  There would be no                     
  opportunity to raise that issue again or to even discover                    
  the issue.  Commissioner Rexwinkel said the department                       
  believes that if they issue an assessment notice in three                    
  years, they have put the taxpayers on notice that the                        
  department disputes their tax return.  From that point until                 
  the final assessment is determined, the department believes                  
  that the tax should be able to go up or down depending on                    
  the additional information that is discovered or determined.                 
  He noted that it is consistent with the 1984 Attorney                        
  General's opinion and some of the federal tax law.                           
  Commissioner Rexwinkel said basically the taxpayer in this                   
  case wants a one way street.  They want to say that the tax                  
  can only go down and the department believes that should not                 
  be the case.  It is not right for the state of Alaska.  He                   
  said they can have it that way as the taxpayer only has to                   
  pay the assessment when the assessment notice is issued.                     
  That doesn't mean that they never have a right to get any of                 
  their money back if they believe that the amount was over-                   
  assessed.  They can file a claim for refund, but once they                   
  pay the tax, that bars the state from coming in and claiming                 
  additional assessments.                                                      
  COMMISSIONER REXWINKEL said the one way street is not right                  
  especially when they are part of the problem.  He said John                  
  Pilkinton can give detail about some of the problems                         
  encountered during the audit process.  Commissioner                          
  Rexwinkel referred to the audit process and said they go in,                 
  do an audit, and there is certain degrees of cooperation                     
  that is received from the taxpayer.  Sometimes the                           
  department doesn't have all the information that is actually                 
  needed in order to make a proper assessment.  Once the                       
  department issues an assessment, that opens up some                          
  additional lines of communication during the informal                        
  conference period.  That is when the amount of the                           
  assessment should be able to be increased or decreased as                    
  the department determines the proper amount of tax.  That is                 
  the question at hand, "Should we have the ability to make a                  
  proper determination of the amount of tax and then should we                 
  have the right from that point to collect it?"  Commissioner                 
  Rexwinkel said the department urges passage of SB 377.                       
  Number 144                                                                   
  DEPARTMENT OF REVENUE, referred to the proposed committee                    
  substitute and said there is one provision that provides for                 
  an absolute five year maximum on any audit assessments.  At                  
  this point, the department thinks that is reasonable.  The                   
  companies have made strides in learning how to handle the                    
  production from the North Slope and have learned how to                      
  account for it.  He said the provision that has been put in                  
  the bill is a compromise and is probably adequate.  It does                  
  cover an issue that the department and companies have had a                  
  problem with in getting in and doing audits.                                 
  MR. PILKINTON said one thing that has happened in the past                   
  and continues to happen is the department couldn't even get                  
  in to start an audit for eighteen to twenty-four months                      
  because the companies weren't ready for the department, as                   
  they were dealing with other taxing authorities such as the                  
  IRS or other states.  The time was restricted before an                      
  audit could even be started.  The department sends audit                     
  requests to companies and it may take them a long time to                    
  get back to the department, the requests may not be                          
  complete.  The department has to go back for further                         
  clarifications.  Sometimes that has been used against the                    
  MR. PILKINTON referred to the audit process and said it is                   
  an involved process.  You're dealing with large multi-                       
  national corporations.  He said in recent years there have                   
  been very few amended assessments.  Most of the problems                     
  relate to early years.  During those early years, there were                 
  many things going on in the world.  There were windfall                      
  profits taxes, Iranian and Iraq problems, etc.  He referred                  
  to the process the department follows and said from the                      
  audit standpoint, they then move into the appeals part of                    
  the process.                                                                 
  MR. PILKINTON explained the taxpayer has several choices in                  
  appeals.  They can accept the audit as presented to them,                    
  they cannot accept it and then they have two routes to go.                   
  One is an informal process which most of the companies have                  
  opted for.  There is a series of negotiations to arrive at                   
  the correct tax amount.  The second is that they can go to a                 
  formal process which is much more of a court type process.                   
  One of the complaints that has been voiced is that the                       
  department has taken too long to assess the taxes through                    
  the informal process.  Mr. Pilkinton explained there is a                    
  regulation on the books, 15 AAC 05.050, that provides that                   
  if at any time the taxpayer isn't happy, they can forget the                 
  formal hearing.  They can go to the Commissioner and say,                    
  "I'm not satisfied with this process, I want to move to                      
  formal hearing."  He explained that nobody has opted to do                   
  that.  If the companies think that the department is taking                  
  too long in the informal process, they should tell the                       
  Commissioner that they want to move on to formal phases.                     
  MR. PILKINTON referred to information he had given the                       
  committee "Oil and Gas Division Historical Information," and                 
  said the last chart is statistical information that is by                    
  the calendar year of the taxes, which shows the number of                    
  taxpayers and the tax dollars collected.  He referred to the                 
  number of audits issued in 1978 and said there were thirty-                  
  five audits and there were nineteen amendments.  Mr.                         
  Pilkinton said there is still one case in court where there                  
  are two taxpayers from 1978 that still have open tax                         
  periods.  He noted that thirty-two cases are closed.                         
  MR. PILKINTON said the final observation about the audit                     
  process and in talking about amendments, 1990 to 1992 the                    
  companies filed 11,257 tax returns.  That is for eighteen or                 
  nineteen producers, twenty-eight oil fields in a thirty-six                  
  month period.  They filed 3,709 amended tax returns.                         
  Thirty-three percent of the tax returns they filed, they had                 
  to go back and amend.  Mr. Pilkinton said from 1993 to date,                 
  they may come back with some more.  They filed 3,993                         
  returns.  They amended 2,737 or sixty-nine percent.  Mr.                     
  Pilkinton said there have been cases where the department                    
  does an audit and the companies are still filing amended                     
  returns.  The process is not a simple process for the                        
  businesses and the department.  Mr. Pilkinton explained that                 
  they have been working on a regulation process to simplify                   
  many things and it should be forthcoming soon.  He urged the                 
  passage of the committee substitute.                                         
  Number 257                                                                   
  COMMISSIONER REXWINKEL said there were many things going on.                 
  Oil started flowing down the taps in 1977.  At about that                    
  time, the department changed the production tax                              
  requirements.  In 1978, a separate accounting tax was                        
  brought on.  At the end of 1981, the separate accounting tax                 
  was discontinued because there were some concerns over its                   
  constitutionality.  He said he believes around 1986, the                     
  U.S. Supreme Court declined to hear that case, basically                     
  upholding the constitutionality of the tax.  Commissioner                    
  Rexwinkel referred to 1982 and explained they once again                     
  changed the production tax statutes to try to make it                        
  revenue neutral with respect to what was on the books before                 
  with separate accounting.  All that time, they were doing                    
  regulations to implement tax requirements and were trying to                 
  keep up with it.  The department started in 1977 with one                    
  auditor and have built up from there.  Some of the years it                  
  has been very difficult to maintain that audit staff in                      
  light of budgetary reductions.  He stated that the prices                    
  were fairly stable in 1978, and then we hit the Iranian                      
  revolution in 1979.  Oil prices skyrocketed.  There were                     
  price controls which lead to a significant amount of oil                     
  being swapped from 105 different crude oils in order to                      
  obtain basically value in excess of the ceiling prices.                      
  Commissioner Rexwinkel said tracking those barrels of oil is                 
  very difficult.  There was the Amerada-HESS royalty                          
  litigation settlement that took many years and tens of                       
  millions of dollars to go through that process.  It was                      
  based on some of that information that the department gained                 
  that they were able to revise some of the assessments with                   
  respect to the production in separate accounting tax.  It                    
  took a long time to get the information and it is not a                      
  simple process.  The industries are dealing with the U.S.                    
  Government and many other states.  A lot of times there is                   
  even a problem in making arrangements to go in to audit the                  
  companies and getting all the cooperation that is needed to                  
  get information.                                                             
  COMMISSIONER REXWINKEL said what the department is asking                    
  for is clarification of the statute of limitations and the                   
  ability to make a proper determination of the tax and to                     
  collect that tax.  He said they are not changing the tax                     
  structure and they are not changing AS 43.55.  They are not                  
  changing AS 43.21.  This is not even a discussion about the                  
  corporate income tax which is AS 43.20.                                      
  Number 294                                                                   
  CHAIRMAN VEZEY asked the commissioner to explain how they                    
  went through the process and the different trigger dates.                    
  He asked what is existing law and what is being proposed in                  
  the committee substitute.                                                    
  Number 299                                                                   
  COMMISSIONER REXWINKEL said there is two statutes that is                    
  being discussed.  One is a six-year statute of limitations                   
  which says that we need to collect the tax within six years                  
  of assessment.  He said the department believes that the six                 
  years begins to run from the date of final determination of                  
  tax.  It seems ludicrous that it would begin from the date                   
  of initial assessment, when it takes years to make a final                   
  determination of tax.  He said this is not unique to the                     
  state of Alaska, there has been many federal cases that are                  
  being heard.  He explained that the time it takes to make a                  
  proper determination on the correct amount of tax is not                     
  unique to Alaska.  Commissioner Rexwinkel said companies can                 
  pay the tax up front when the department issues an                           
  assessment notice.  They have every right to pay that tax                    
  assessment.  If they do, the department cannot any longer                    
  assert any new claims.  That basically closes that tax                       
  return.  The taxpayer can file a claim for refund and if                     
  they do and they can successfully argue the issues, there is                 
  always an opportunity at that point for the tax to go                        
  downward but not upward.  They do have the opportunity to                    
  put the lid on the amount of the tax.                                        
  COMMISSIONER REXWINKEL said there is the three year statute                  
  which means from the time the return is submitted, the                       
  department has three years in which to audit the return.  He                 
  said often the taxpayer will give an extension of time.  It                  
  is almost mandatory because when the department is trying to                 
  audit two or three years worth the periods at one time in                    
  order to gain a lot of efficiencies, the department is just                  
  getting started with the audit process when the statute                      
  would begin to become effective.  The taxpayers do give                      
  waivers on the statute.  At some point, that process is over                 
  and the department issues an assessment notice.  The                         
  taxpayer then has the option to pay the tax or protest the                   
  assessment.  Commissioner Rexwinkel said if they protest the                 
  assessment, they also have some further options.  They can                   
  request an informal conference, which most of them do, or                    
  they can go into formal hearings.  They can also go into                     
  formal hearing at any time during the informal conference                    
  process.  They have that right according to regulation.                      
  COMMISSIONER REXWINKEL explained that during the informal                    
  conference period a lot of additional information is                         
  gathered.  That helps to make a proper determination of the                  
  tax.  Eventually there is a proper determination made.                       
  Number 340                                                                   
  COMMISSIONER REXWINKEL said the department has always had                    
  the position that it is six years from the date of the final                 
  determination of tax to make the collection.  MR. PILKINTON                  
  noted that is once the taxpayer has exhausted all their                      
  remedies through the administrative process, as well as the                  
  courts, and not six years from the assessment date which is                  
  what the present statute can be interpreted.                                 
  Number 348                                                                   
  CHAIRMAN VEZEY asked what the department is asking to be                     
  able to have after the taxpayer has gone through all the                     
  hearings, appeals, and court actions.                                        
  MR. PILKINTON said when the amount has been established                      
  through that whole process, the department is asking for six                 
  years to get the check in hand.  It should come immediately                  
  if they have used all of that period, but if the department                  
  has to institute collection action, the department has six                   
  years to do that.                                                            
  Number 354                                                                   
  CHAIRMAN VEZEY said there is a court judgment and it is his                  
  understanding that there isn't an expiration date.  He asked                 
  the commissioner to explain why an additional six years is                   
  needed after it has gone to the U.S. Supreme Court and they                  
  say the tax is owed.                                                         
  COMMISSIONER REXWINKEL said they have six years to get the                   
  money in.                                                                    
  CHAIRMAN VEZEY asked what happens if they don't pay in six                   
  COMMISSIONER REXWINKEL said they are probably bankrupt.                      
  CHAIRMAN VEZEY said it would seem to him that the department                 
  would have to go back to court to get an extension of the                    
  MR. PILKINTON suggested getting testimony from the                           
  Department of Law.                                                           
  CHAIRMAN VEZEY said the controversy is, we currently have a                  
  three year limitation on tax assessments.  He asked when the                 
  three years starts and ends.  He also asked what the                         
  proposal is in the bill and how it will change.                              
  COMMISSIONER REXWINKEL explained that the three years begins                 
  from the date the taxpayer files the returns.  It is sort of                 
  like filing with the IRS.  They have three years to audit                    
  your return.  If you don't hear from them in three years,                    
  they don't get to audit your return anymore.                                 
  CHAIRMAN VEZEY asked if the department audits all the oil                    
  COMMISSIONER REXWINKEL said they do audit all the companies                  
  and when they file a monthly production tax return, the                      
  department doesn't audit every month.  It would be a                         
  tremendous burden on the oil industry and the state of                       
  Alaska.  The department accumulates several returns before                   
  they go in and do the audit.  He said they try to accumulate                 
  two or three years worth of returns and by that time they                    
  are bumping against the statute on the oldest return that                    
  was filed.  In many cases, the taxpayers will provide the                    
  department with an extension of the three year statute.  At                  
  some point in time, the department needs to finish the audit                 
  and issue an assessment notice.                                              
  CHAIRMAN VEZEY asked why the oil companies are willing to                    
  grant an extension.  The current law is three years.  They                   
  could say "no extension" and it would be all over.  Chairman                 
  Vezey asked why the companies are willing to grant the                       
  Number 383                                                                   
  MR. PILKINTON said if they are unwilling or are unable to                    
  get an extension at that point, the department has to file                   
  an assessment based on the best information that is                          
  available.  In terminology, it would be called a "jeopardy                   
  assessment."  He said they are not out to make the issues as                 
  broad as possible, we are trying to narrow them and that                     
  requires the information.  If the department is stonewalled                  
  and doesn't get the information, then the department has to                  
  file on what they have to protect the state's interest.                      
  Normally, the companies will give an extension.                              
  CHAIRMAN VEZEY clarified that the companies and the state                    
  see it in their best interest to mutually agree to an                        
  extension.  An unidentified speaker said, "correct."                         
  Number 394                                                                   
  REPRESENTATIVE HARLEY OLBERG asked what the definition is of                 
  MR. PILKINTON said it is the actual letter that goes to the                  
  taxpayer demanding payment for the underpayment amount.                      
  REPRESENTATIVE OLBERG asked if there is a three year limit                   
  during which the department can do that.                                     
  MR. PILKINTON said there is a three year limit in getting an                 
  assessment out unless it is extended.  It could go beyond                    
  three years.                                                                 
  CHAIRMAN VEZEY asked if the testimony is that it takes a                     
  period of time just to start an audit and the department is                  
  nowhere near the (indiscernible) completed (indiscernible)                   
  normally at the end of three years.  Three years is not a                    
  normal audit cycle.                                                          
  MR. PILKINTON said, "That is correct."                                       
  Number 405                                                                   
  COMMISSIONER REXWINKEL said if there is a question about the                 
  length of time it takes to conduct an audit under the                        
  provisions, we have full consideration determinations and                    
  that means looking at contracts.  We have prevailing value                   
  considerations and that means, perhaps, looking at what                      
  other oils were sold for.  It takes awhile to get that                       
  information as it isn't readily obtainable.  There is some                   
  proprietary interest in this information.                                    
  CHAIRMAN VEZEY said it is his understanding that they are                    
  referring to Section 8 of the bill.  He said it is his                       
  understanding that for tax periods beginning after December                  
  31, 1993.  He read from the bill, "(indiscernible) the                       
  amount of tax imposed by this title must be assessed within                  
  five years after the return was filed."  He said that is the                 
  new provision that the department is asking for.                             
  COMMISSIONER REXWINKEL said that is correct.  Chairman Vezey                 
  said current statute says three years.                                       
  MR. PILKINTON clarified that part of the controversy about                   
  the section is that after that three year time period is up                  
  of the issue of the initial assessment, we are in the                        
  informal process.  During that time period there are                         
  adjustments to things that have been found and as a result,                  
  amended assessments have been issued.  The amendment is the                  
  controversy in this issue, whether the state should have the                 
  right to raise the assessment or lower the assessment during                 
  this informal conference period.                                             
  Number 443                                                                   
  COMMISSIONER REXWINKEL said the future provision beginning                   
  with Section 8, Items 2  says, "for periods beginning after                  
  December 31, 1993, there is a five year statute," and it                     
  goes on to say that after that five year period, the                         
  department may not increase an assessment under this                         
  subsection.  He said in the future, we are going to be held                  
  to a tighter and higher standard.  There will be five years                  
  in order to determine the amount of tax.  Things have                        
  changed, things are a lot easier.  We are now better able to                 
  track the barrels of oil, we no longer have ceiling prices,                  
  we can determine what some market prices are, we have better                 
  access to information and moving forward in the production                   
  tax area, the department can make that proper determination                  
  in a five year period of time.                                               
  CHAIRMAN VEZEY asked why the state wouldn't figure out what                  
  they think is owed and multiply by ten and submit it so they                 
  don't have to worry about going above the number that is                     
  Number 456                                                                   
  MR. PILKINTON said that is something described earlier, the                  
  jeopardy assessment.  He said the department doesn't want to                 
  do that.  We can come to the right number and adjust it when                 
  the new information becomes available.  He said that is the                  
  right way to do it.  It is not right to just throw a number                  
  out there unless you have to.                                                
  Number 460                                                                   
  REPRESENTATIVE BETTYE DAVIS said at the present time there                   
  is the three year statute and the five year statute and the                  
  department is saying they are not able to make the                           
  assessments because the department is still gathering                        
  information.  The oil companies, at this time, are allowing                  
  the department to extend the time beyond the three years.                    
  She said they are doing that already.  What the department                   
  is trying to get changed is that the set three years is                      
  moved to five years from 1993 and beyond.                                    
  MR. PILKINTON said that is correct.                                          
  REPRESENTATIVE B. DAVIS asked what is going on from 1992                     
  back.  She asked where the retroactive part comes in and why                 
  are people saying that what the department is requesting is                  
  unreasonable because they are assessing taxes on something                   
  that has already been settled on.                                            
  Number 470                                                                   
  MR. PILKINTON said the department issues that assessment                     
  within a timely period.  But from the assessment until a                     
  settlement on a tax, the department finds out additional                     
  information.  During the negotiation process, things become                  
  obvious.  He said the department lowers the assessment if                    
  they find something in the taxpayer's favor.  If something                   
  is found that is not in the taxpayer's favor and is in favor                 
  of the state, we think that the assessment should be                         
  increased.  He said the assessment has been increased but                    
  now the companies have come forward and tried to put forward                 
  the defense that they are beyond the three years and the                     
  department is barred from making any adjustments.                            
  REPRESENTATIVE B. DAVIS said the companies have no problem                   
  with the state assessing up to the five year period, but                     
  they do have a problem with the state going back to what has                 
  already gone beyond the three years which they have                          
  automatically extended.                                                      
  MR. PILKINTON said the companies have problems with the                      
  state in amending those assessments.  He said the bill gives                 
  the state a chance to clean up the old tax cases and gives                   
  us five years from now on to take care of any problems in                    
  the department's assessments.                                                
  REPRESENTATIVE B. DAVIS asked if the bill passes what would                  
  MR. PILKINTON said the department is trying to finish cases                  
  through the informal and formal process.                                     
  REPRESENTATIVE B. DAVIS asked if everything would then move                  
  from an informal to a formal hearing.                                        
  MR. PILKINTON said that is the process that the department                   
  is currently in.  He said the taxpayer can force a formal                    
  hearing or as the division finishes their informal                           
  conference decision, then it forces it into a formal hearing                 
  REPRESENTATIVE B. DAVIS asked if the state is concerned now                  
  that the state will lose a certain amount of dollars because                 
  those assessments are not completed that are about to run                    
  out of time.                                                                 
  MR. PILKINTON said because they haven't completed those                      
  assessments and/or that they haven't collected on the six-                   
  year statute.                                                                
  Number 503                                                                   
  REPRESENTATIVE B. DAVIS said when this is completed, there                   
  will be one statute and it will be a five year statute.                      
  COMMISSIONER REXWINKEL said there will be a five year audit                  
  statute and there will still be the six year collection                      
  CHAIRMAN VEZEY questioned whether the six years is the                       
  current statute.                                                             
  COMMISSIONER REXWINKEL said that is correct.                                 
  MR. PILKINTON said the part that is unclear in the current                   
  statute is the six years from the original assessment.  What                 
  the department says it should be is six years from the time                  
  the taxpayer has exhausted all their rights.                                 
  Number 512                                                                   
  REPRESENTATIVE FRAN ULMER said if you strip away all the                     
  rhetoric on both sides and in its simplest form, doesn't                     
  this bill just bless the status quo to the past and in the                   
  future impose a five year limit for assessments.                             
  COMMISSIONER REXWINKEL said that is correct.                                 
  REPRESENTATIVE ULMER said when people offer the criticism                    
  that you are "changing the rules of the game" what do they                   
  mean by that.                                                                
  COMMISSIONER REXWINKEL said what he thinks what they are                     
  trying to say is that somehow we are increasing the taxes in                 
  changing the tax laws.  He said we are not changing AS                       
  43.55, the production tax laws.  We are not changing AS                      
  42.21, the separate accounting tax laws.  We are just trying                 
  to clarify the fact that we want to be able to do what we                    
  were doing in the past and make some changes about how we                    
  are going to do business in the future.  Commissioner                        
  Rexwinkel said if the bill is passed, it's not that the tax                  
  assessments are going to automatically increase by some                      
  percentage.  He said the department wants the opportunity to                 
  be able to collect on the assessments that are out there.                    
  REPRESENTATIVE ULMER asked if that is dramatically different                 
  from what other states are doing.  She said people are                       
  concerned that if we do this it may make Alaska                              
  noncompetitive with (indiscernible) because this is somehow                  
  different from what Texas or other states that are oil                       
  states do.                                                                   
  MR. PILKINTON said he doesn't have some of the comparisons                   
  with him.                                                                    
  Number 533                                                                   
  REPRESENTATIVE BILL HUDSON said it looks to him like there                   
  are a lot of past years where taxes were due, were filed,                    
  were assessed, and were appealed.  Now we are running up                     
  against the time frame in which you can't make any changes.                  
  He asked if that is what the oil companies are asserting.                    
  MR. PILKINTON said the oil companies are asserting that the                  
  state can't collect them.                                                    
  REPRESENTATIVE HUDSON said the oil companies are claiming                    
  that even though they have been assessed...  So there is a                   
  value, you have a value and they have got a value and time                   
  has run out and they are saying, "Sorry, you don't even get                  
  to collect our value."                                                       
  MR. PILKINTON said that is correct.                                          
  Number 540                                                                   
  REPRESENTATIVE G. DAVIS said there are amounts on all of                     
  these (indiscernible) and you have apparently gotten a                       
  verbal extension approval by the taxpayers.  He asked if any                 
  one company has held the department to the three years and                   
  said, "The three years is up and we do not agree to any kind                 
  of an extension."  The answer to this question was                           
  MR. PILKINTON said in subsequent periods, the department has                 
  found additional information and has gone back and made an                   
  additional assessment based on that new information that                     
  became available.                                                            
  REPRESENTATIVE G. DAVIS questioned what the additional                       
  information was.  He asked if the department found mistakes                  
  in their information or the department's information, or is                  
  there a new theory imposed.  He asked if something was found                 
  in the IRS code that could be inserted that might raise the                  
  MR. PILKINTON said the IRS code is totally different.  He                    
  said the department may be in the process of auditing                        
  company "C" and find transactions between that company and                   
  company "E" that leads the department to a new theory in                     
  discovering something that wasn't known.  To protect the                     
  state's rights, the department files an amended assessment.                  
  REPRESENTATIVE G. DAVIS said Commissioner Rexwinkel had                      
  indicated that he would like to simplify the process and                     
  asked if that can be done by the state or is there federal                   
  guidelines and regulations that prohibits the state from                     
  simplifying it.                                                              
  COMMISSIONER REXWINKEL asked if he means how the department                  
  computes the tax for the future.  He said there was another                  
  bill that was introduced in the House, HB 547, and the                       
  department did propose a draft substitute for that which                     
  would change the method of computing the value of the oil                    
  for the future.  That would greatly simplify the process                     
  from now in trying to make a determination of full                           
  consideration.  He said full consideration is sometimes                      
  tough to determine because there are a lot of interrelated-                  
  type companies and a lot of interrelated-type transactions                   
  between nonrelated companies and it's sometimes difficult to                 
  determine exactly what is being received in light of what                    
  may else be transacted in some other side of a transaction.                  
  He said perhaps we are auditing one company and we come                      
  across some information that gives additional information                    
  with respect to the other company and how they reported the                  
  value of the oil.                                                            
  Number 577                                                                   
  REPRESENTATIVE G. DAVIS said it is within the state's grasp                  
  without needing any federal legislation or change in federal                 
  TAPE 94-55, SIDE B                                                           
  Number 000                                                                   
  UNIDENTIFIED SPEAKER:    "...so that was for how many years                  
  UNIDENTIFIED SPEAKER:  "Year and a half."                                    
  CHAIRMAN VEZEY said,  "I want to thank both of you for your                  
  testimony. I think we have picked up some very helpful                       
  information.  But we do need to try to keep things moving.                   
  I would like to have the committee hear from Attorney                        
  General, Bruce Botelho."                                                     
  Number 009                                                                   
  BRUCE BOTELHO, ATTORNEY GENERAL, testified regarding SB 377.                 
  He said, "I appreciate the opportunity to speak with you.                    
  I'd like to make some brief comments before I present to you                 
  a recommended House Committee Substitute for CSSB 377."                      
  MR. BOTELHO said, "Representative Ulmer asked whether it was                 
  true that stripped of all of the rhetoric, whether this bill                 
  simply confirmed current practice and change for the future,                 
  the statute of limitations.  The commissioner correctly                      
  answered that that was the case.  You have focused, Mr.                      
  Chairman, on the retroactivity provision.  I think that's                    
  very important.  I'd submit that I think Representative                      
  Olberg's question, `What is an assessment?' really is a key                  
  element here.  Fortunately, not that we're happy with the                    
  result of what the Supreme Court said, it has provided us an                 
  answer in its recent decision dealing with HB 58.  In that                   
  decision the Supreme Court said that we need to know when                    
  the administrative trial begins; what triggers it?  To know                  
  where the money goes.                                                        
  "And the Supreme Court said the answer is that an assessment                 
  is to the administrative trial, like a complaint is in a                     
  civil trial in court.  There's a very important element that                 
  the court, making that analogy -- let me explain why,                        
  because it also explains what the historic position of the                   
  Department of Revenue and the Department of Law has been.                    
  There are also statutes of limitations, as you know, in the                  
  whole arena of civil litigation, and, for that matter, in                    
  criminal litigation as well.  Some are two years, some are                   
  three, some are six, some are ten.  And there are some                       
  cases, capital cases, that have no statute of limitation at                  
  all.  And in every case, there is a doctrine that has                        
  emerged in civil litigation, and that is, that if you don't                  
  file your complaint within the statute of limitation, within                 
  two years, you are forever barred from litigating that case.                 
  And the defendant is protected from being attacked at some                   
  later date.                                                                  
  "But there's another doctrine that is equally important,                     
  that is, if you satisfy the filing of the complaint within                   
  the two year period, the courts permit you to file amended                   
  complaints after the two year period.  And they have a                       
  doctrine they call relation back; for lawyers, a rather                      
  metaphysical kind of event, that means essentially, that the                 
  amended complaint is as if it were filed on the original                     
  date.  And that is the concept you'll find universally, in                   
  every court system in the United States.  It was not,                        
  initially, anything found in any statute.  You won't find it                 
  in our statutes, either.  What you will find in the                          
  rulemaking powers of the Alaska Supreme Court, they have                     
  finally adopted, in the civil rules, copying the federal                     
  civil rules, a specific provision that identifies this                       
  doctrine of relation back...you'd find it at Civil Rule                      
  "That brings us now to statutes of limitations on the tax                    
  side.  The position taken by the Department of Revenue, and                  
  its practice was, that it had to file an assessment in a tax                 
  year, within the three-year statute of limitations.  If it                   
  didn't do so, it was gone forever.  But if it did file as it                 
  has, I think, conscientiously tried to do in every case, but                 
  not always succeeding, filed within the three year period,                   
  it would be free to later amend the complaint, the                           
  assessment, and that later amendment would relate back to                    
  the original date.  It will have satisfied the statute of                    
  "That was the practice with this tax statute, and earlier                    
  ones dealing with individual income tax.  We operated under                  
  this very tax regime for nearly 10 years before the issue                    
  was challenged by a taxpayer, Exxon, and they said, `Look,                   
  our interpretation of the law is, that three years is three                  
  years.  And your idea that it relates back is wrong.  You                    
  have to do it all within the three years period.'  That's                    
  the controversy, is one of statutory construction.   But, as                 
  I say, it was raised for the first time nine years into the                  
  tax regime that we're talking about here.  The issue was                     
  briefed.  The initial decision at the administrative level                   
  was that the state position was right.  That was appealed to                 
  the Superior Court.   The Superior Court reversed [the                       
  decision] and concluded that the state's position was wrong.                 
  That [decision] was in turn appealed to the Supreme Court.                   
  That argument is actually to be heard on May 18.                             
  "But that really isn't the genesis of the controversy.  That                 
  led the administration to do two things:  (1) to proceed on                  
  the appeal itself; and (2) to introduce, last year, SB 185.                  
  That bill took on not only the three-year statute of                         
  limitations, asked this body to affirm the state's                           
  interpretation of the act, but also to deal with the six-                    
  year statute of limitations on collections.                                  
  "Now, the six-year may be a lot easier, it's basically to                    
  say:  Look, State of Alaska, you have six years to collect a                 
  tax once you finally know what it is, and once the taxpayer                  
  knows what it is.  There was a second case that involved                     
  Tesoro.  Tesoro said, `State of Alaska, you assessed the tax                 
  on time, that's not a problem.  But it's taken a long time                   
  to go through the administrative appeals and into the                        
  courts.  In fact, it's taken more than six years and - ah,                   
  ha!  While we owe the tax, because you didn't collect it                     
  within six years of the assessment date, we don't have to                    
  pay.'  That went to the Superior Court.  The Superior Court                  
  said, `No, you're wrong.' There is also an implied doctrine,                 
  and it's fairly uniform, that the six-year statute can be                    
  tolled, that is, held in abeyance, until the final tax                       
  determination has been made.                                                 
  "We have a decision from the Superior Court that was                         
  appealed to the Supreme Court and we settled it last year                    
  with Tesoro, after having waited 13 months after oral                        
  argument in front of the Supreme Court, for decision.  Both                  
  parties decided it was probably one that we should resolve,                  
  and we did so.  That led us then to this legislative                         
  session.  There was testimony in the Senate, and I think                     
  correctly so, by taxpayers, saying that one of the problems                  
  we have is there is a lack of certainty; a lack of stability                 
  in our tax policy, to the extent that we don't know when the                 
  assessments are going to come.  We need to have some                         
  "The Administration heard that, and proposed a committee                     
  substitute, the one that is before you today, that would                     
  continue to affirm the state's past position, but make a                     
  correction for the future.   That is to say, beginning this                  
  tax year, taxpayers can know that once they've filed, the                    
  state of Alaska has five years within which to issue an                      
  assessment or whatever number of (indiscernible) assessments                 
  to do, but after five years, you haven't done your job,                      
  that's it.  State of Alaska, you cannot attempt to raise the                 
  assessment beyond that date.                                                 
  "We've had discussions with the industry over the last                       
  several weeks regarding this controversy.  It has actually                   
  been an opportunity for some wide-ranging discussions that                   
  would try to solve several other long-standing controversies                 
  between the state and the industry.  As a result of that,                    
  while I cannot suggest to you that we have reached agreement                 
  with the industry on any set of proposals, we have proposed                  
  and would like to distribute to you now a recommended                        
  committee substitute to this committee substitute for SB
  377.  With your permission, if I could provide that to your                  
  clerk for distribution."                                                     
  MR. BOTELHO provided a copy of the CS to the clerk for                       
  distribution to the committee.                                               
  MR. BOTELHO explained the CS.  "This proposed CS does                        
  several things.  First of all, it focuses only on the oil                    
  and gas issues.  Thus, it differs from the bill presently                    
  before you in the respect that it deletes all non-statute of                 
  limitations issues from it.  That is the first difference                    
  between the bill the committee has and our proposed                          
  CHAIRMAN VEZEY asked him to repeat his remarks and Mr.                       
  Botelho did so.                                                              
  MR. BOTELHO continued, "It has the retroactivity provisions,                 
  both for collections and for the statute of limitations on                   
  assessments; that is to say, affirming the Administration's                  
  long-held positions on both.  It incorporates the five years                 
  for the future.  And here are the add-ons that come with it:                 
  "One of our major sources of dispute with the industry has                   
  been over the treatment of gas liquids.  We are proposing                    
  definitions that would make clear that the gas liquids at                    
  issue are gas rather than oil.  This is a major concession                   
  on the part of the Administration in the sense that we have                  
  argued at length that these liquids should be treated as                     
  oil, and therefore taxed at a higher rate.  The proposed                     
  language in this definition will treat them as gas.  The                     
  second feature, focusing on the concern about stability and                  
  finality, is a provision which would allow the Department of                 
  Revenue to adopt regulations setting a methodology for oil                   
  valuation.  Very much like what we have done in our various                  
  royalty settlements - we actually have three major                           
  settlement methodologies on the royalty side, one each with                  
  Exxon, BP, and ARCO, and then remaining producers on the                     
  North Slope are able to select among those three.  We would                  
  like to see, and the Department of Revenue has been working                  
  at great length with the industry, to come up with a set of                  
  regulations satisfactory to all.                                             
  "We would further be proposing a similar approach to gas                     
  valuation.  Again, our efforts are aimed at providing                        
  certainty to the industry and to the taxing authority in                     
  trying to calculate what the obligations are.  Various                       
  sections of this bill will have different effective dates.                   
  The retroactivity provisions dealing with the statute of                     
  limitations will go back to the inception of the statute.                    
  The definition with regard to gas processing plant, the key                  
  to the question of this gas liquids, would be retroactive to                 
  1987, and that will have a consequence of some substantial                   
  tax credits to producers.                                                    
  "We urge the committee to put, and our version reflects it,                  
  a different effective date on the oil valuation methodology.                 
  That is, it should kick into place as soon as we have                        
  resolved with the remaining taxpayers, all disputes dealing                  
  with separate accounting.  That was the tax that was in                      
  effect between 1978 and 1981.  We believe that by doing so,                  
  the legislature will create a great incentive to early                       
  resolution of the remaining cases.  We have four pending                     
  right now of the original, I think 40, taxpayers that were                   
  involved.  This is what the Administration would recommend.                  
  To accomplish this, it would also be necessary for the                       
  committee and for the body to adopt a resolution amending                    
  the title that will require a two-thirds vote of each body.                  
  We have prepared such language."                                             
  MR. BOTELHO sought out the clerk for distribution of the                     
  amended title language.  "Finally, we have prepared a                        
  sectional analysis for the committee so that it would have                   
  an opportunity to review, perhaps, in less pressing moments,                 
  an opportunity to understand what this bill is about."                       
  Number 208                                                                   
  A clerk became available and was given the title information                 
  for distribution.                                                            
  MR. BOTELHO concluded his remarks by saying he was available                 
  for questions.                                                               
  Number 214                                                                   
  CHAIRMAN VEZEY said, "The first question I'd like to ask,                    
  Mr. Botelho, and you may not have great knowledge here so                    
  don't feel that you have to pretend you do, but I happen to                  
  remember that in the 70s -- the state of Alaska has been an                  
  oil-producer for about a quarter of a century.  In the 70s                   
  we brought experts from all over the world up here.  These                   
  statutes were not thought of by a bunch of people who had                    
  never been involved in oil.  This was put together by some                   
  of the best minds in the country under the auspices of the                   
  legislature that very much wanted these tax revenues.  Why                   
  are we having so much difficulty in defining terms?  The oil                 
  industry has been producing oil for a century in this                        
  Number 223                                                                   
  MR. BOTELHO responded, "I think it's a very good question                    
  and also a difficult one to answer.  I think that it is                      
  reflected in part by the fact that you really are talking                    
  about at least three different periods in our state history,                 
  if we just talk about the last, say, 18 years.  The statute                  
  of limitations issue really evolved in 1976; if you look at                  
  the legislative history there's almost none because it's                     
  described as simple housekeeping.  1976 also marked the year                 
  that we started dealing with legislation on separate                         
  accounting and revisions to the production tax that carried                  
  over to 1977 and 1978.  We had the lawsuit that was filed in                 
  1979 by the producers, challenging the constitutionality of                  
  separate accounting, and that lead this body then to abandon                 
  it in 1981 in favor of what's called modified apportionment.                 
  "But to be more specific, there were a lot of experts.                       
  There were specific recommendations made.  They invariably,                  
  as part of the political process, were modified.  They were                  
  under constraints of time, the legislative pressures,                        
  modifications made in committees, modifications made on the                  
  floor.  And as is often the case, particularly in the tax                    
  arena, the final ingredient is the willingness of the                        
  legislature to delegate authority to the commissioner of                     
  revenue to adopt regulations.  In fact, I would say a good                   
  portion of the battles that have taken place over the                        
  statutes or over the tax scheme have been over the                           
  regulations.  Do the regulations comply with or are                          
  supported by the underlying statutes.   I would tell you                     
  that when lots of money is at stake it is an issue worth                     
  litigating between the state and the taxpayers, and done in                  
  good faith on both sides.  I think the human experience is                   
  that when there's a controversy over lots of money people                    
  are willing to fight very hard.  That's not to detract                       
  either side... I think that explains - - You set up a fairly                 
  broad scheme, you leave it to regulators and administrators                  
  to adopt regulations, again, their primary view is to                        
  maximize returns to the state consistent with the law, and                   
  taxpayers who challenge whether the administrator had the                    
  authority to do so."                                                         
  Number 263                                                                   
  CHAIRMAN VEZEY said, "Thank you.  You do seem to be quite                    
  familiar with how we got to where we're at.  But all these                   
  other 20, 25 oil producing states in the nation, they've                     
  been assessing oil since before the turn of the century,                     
  certainly since the 20s in a big way, why do we have                         
  questions in law over things like the definition of `three                   
  years from assessment'?  Why do we have questions in law                     
  about `six years for collection'?  These terms have been                     
  around for a long time."                                                     
  Number 271                                                                   
  MR. BOTELHO commented, "They have, Mr. Chairman.  Again,                     
  that's why we're fairly confident about prevailing in the                    
  Supreme Court.  The difficulty is you have judges who are                    
  literalist.  You have judges who are very aware of these                     
  doctrines, not written down, but which are accepted, like                    
  relation back.  And so you can come up with legitimate                       
  differences.  As I indicated to you, we don't have a                         
  legislative history on the three- and six-year statute of                    
  limitations here.  So it becomes an opportunity to litigate.                 
  There is a lot of money at stake as well.  Having said that,                 
  I don't want to suggest this is a grab for a tax break by                    
  industry.  They are legitimately frustrated at the same time                 
  with the length of time it has taken to resolve these tax                    
  disputes.   Coupled with a good argument to be made on the                   
  statute of limitations, there is an equitable side to it as                  
  well, which is saying, `Enough is enough, this has dragged                   
  on long enough, we may be responsible for part of it, but                    
  the state is as well," and we're going to put it to the test                 
  right now."                                                                  
  Number 292                                                                   
  REPRESENTATIVE HUDSON asked, "Mr. Attorney General, it seems                 
  like the adoption of regulations appears to be one of the                    
  major elements in the revisions we have here, in order to                    
  develop the stability and finality that the oil people are                   
  claiming that they don't have at the present time.  Can you                  
  amplify that just a little bit?  How are they developed so                   
  as to satisfy, for example, the industry?"                                   
  Number 300                                                                   
  MR. BOTELHO responded, "The Commissioner and Director                        
  Pilkinton, along with the staff of the Department of Law,                    
  have been engaged in a cooperative effort with members of                    
  the (indiscernible) tax committee, and that effort has been                  
  going on for several months.  We have set a goal of early                    
  June in reaching agreement.  We have six different working                   
  groups in six different tax issues working towards                           
  resolution.  I think you would find that, without exception,                 
  the industry indicating that we've made great strides                        
  towards reaching consensus.  We're not all the way there,                    
  but I think the attitude both within the Administration --                   
  I'm talking about the audit and attorney level, the line                     
  people -- feel comfortable about the direction we're going                   
  as well.  But most importantly I think the industry has been                 
  pleased that we've stepped up to the plate to try and solve                  
  issues that we have previously lobbed grenades back and                      
  forth over in the last several years.                                        
  Number 318                                                                   
  CHAIRMAN VEZEY asked, "Before we take any more questions,                    
  Mr. Botelho, would it be your interest to go through this                    
  proposed committee substitute and different sections and                     
  explain the whole bill?  Would you like to explain the                       
  differences?  How would you like to...?"                                     
  Number 322                                                                   
  MR. BOTELHO said, "Mr. Chairman, I know you're under a great                 
  time constraint here.  I would be glad to do just a very                     
  brief overview, if that would be helpful, or to continue                     
  answering questions at your pleasure."                                       
  Number 326                                                                   
  CHAIRMAN VEZEY responded, "If you would, let's please do a                   
  brief overview first so we'll have a little more of a basis                  
  for where we're at."                                                         
  Number 327                                                                   
  MR. BOTELHO stated, "Section one is important from the                       
  standpoint that it sets forth the basic findings for this                    
  legislation and it focuses on the statute of limitations                     
  issue.  First, again, affirming that the state's                             
  interpretation about the three years, that is, the relation                  
  back doctrine, has been the correct interpretation, and,                     
  secondly, that with regard to the six-year statute on                        
  collections, that the state has six years from the time                      
  there has been a determination about how much is owed.  The                  
  findings also specifically address the fact that industry                    
  has expressed concern about the lack of finality, and that                   
  is the justification to going to a five year prospective,                    
  beginning this tax year, statute of limitations after which                  
  there would be an absolute bar.                                              
  "Section two is the reaffirmation in language to the three-                  
  year statute, to make clear what we believe has been the                     
  case all along, that the state is free to amend the                          
  assessment after the three year statute has taken place.                     
  "Section three is on the collections, six-year statute.                      
  While there is an appeal pending, the six year statute of                    
  collections is on hold, and until their final determination                  
  is made on the tax, the state clock does not start running.                  
  "Section four refers to the proposed valuation methodology                   
  for the future on oil, and provides that the department                      
  shall adopt regulations.  The regulations we're talking                      
  about, the sidebars that are found in this, are really the                   
  sidebars we have already negotiated in the regulations                       
  project with the industry.                                                   
  Number 366                                                                   
  CHAIRMAN VEZEY interjected a comment:  "Section four is                      
  rather long, and I'm sure there's more not here than here."                  
  Number 367                                                                   
  MR. BOTELHO said, "That's right, and I misspoke, also, Mr.                   
  Chairman.  Section four also includes a section for                          
  prevailing value for gas.  This has been a concern,                          
  particularly for certain Cook Inlet producers, and we've                     
  been working with -- Our goal has again been to adopt                        
  regulations which will provide them similar certainty.                       
  Their primary interest is to see the royalty valuation                       
  methodology adopted, and we have left that as an option.                     
  We're still, I think, frankly, in discussions, with them.                    
  "The next substantive section, and I think the meat of the                   
  bill -- actually Section five and Section six are those                      
  dealing with the gas processing plant, the combination of                    
  what to do with gas liquids.  They really are tied together,                 
  though, the consequence of which is to permit those liquids                  
  to be treated as gas rather than oil, and therefore, be                      
  taxed at a lower tax rate.  This language has been the                       
  result of some fairly intense negotiation with industry over                 
  exact language, and I think reflects the industry's views.                   
  "The remaining provisions are effective date provisions and                  
  what we believe is a very important clause here, the                         
  nonseverable provisions; important, because we see this as a                 
  package deal, one that we believe may be seen retroactively                  
  as being somewhat punitive, though, as we say, we see it as                  
  simply an affirmation of our current position, but one which                 
  prospectively should be of great incentive and great                         
  interest to the industry as well as to the state in                          
  narrowing differences, eliminating controversies where we                    
  can, and obviously, in a couple of respects, actually having                 
  direct monetary benefits, tangible benefits to the industry                  
  Number 408                                                                   
  CHAIRMAN VEZEY interjected, "If we can, briefly, go                          
  back...[in] Section four I believe I heard you comment that                  
  that had been worked out in consultation with the industry?"                 
  Number 412                                                                   
  MR. BOTELHO explained, "Mr. Chairman, that is correct.  The                  
  language that we have here is largely language that we                       
  received from the lead taxpayer.  It probably would not be                   
  inappropriate to indicate that this is language that had                     
  been originally proffered by BP in discussions with the                      
  state, and is language that ties in directly with language                   
  that AOGA has proposed jointly with the state in the                         
  regulations project that the commissioner spoke of earlier.                  
  So this basically is a direct authorization for the                          
  regulations which the department would intend to adopt later                 
  this summer."                                                                
  CHAIRMAN VEZEY commented, "And Section seven makes the,                      
  well, Section two, which is the tax assessment period                        
  retroactive to January, 1976."                                               
  Number 431                                                                   
  MR. BOTELHO said, "Yes, that is correct, Mr. Chairman, and                   
  that date is the effective date of the initial legislative                   
  act creating the three-year statute of limitations on                        
  assessments, and the six-year statue of limitations on                       
  collections.  There are two other retroactive provisions,                    
  Mr. Chairman.  Section eight, which is the retroactive                       
  provision for the gas liquids issues, and which would have                   
  the consequence of retroactive payments, in essence, to the                  
  industry; and the final, key departure from the normal                       
  effective dates, is our proposal that the oil valuation                      
  methodology statute not take effect until we have resolved                   
  the remaining separate accounting cases.  As I said, we                      
  suggest this primarily as an incentive to those taxpayers in                 
  the state to reach early resolution, because the benefits                    
  prospectively on a fixed methodology, we think, are of great                 
  value, both to the industry and the state."                                  
  CHAIRMAN VEZEY thanked Mr. Botelho and asked if there                        
  questions for him.  Chairman Vezey recognized Representative                 
  Number 457                                                                   
  REPRESENTATIVE ULMER said, "You know, Bruce, most                            
  legislators want to be fair to both the oil industry and the                 
  people of the state, and want to strike a balance, and I am                  
  glad you are proposing a CS for us to consider, but I want                   
  to return to the second question that I asked the                            
  commissioner of revenue.  How different are we from other                    
  states?  Because one of the things that we hear a lot is                     
  that if the state of Alaska adopts this legislation, that                    
  we're somehow sending the signals to industry that this is                   
  not a friendly place to do business, and that we may be                      
  somehow discouraging the industry here.  I don't think this                  
  legislature wants to do that, and that's why I'm curious,                    
  how different is the way in which we treat the assessment,                   
  the tax collection, and the retroactivity that we've been                    
  discussing - how different is that from other states and                     
  other oil jurisdictions?  And if you can't answer that                       
  today, I would appreciate that answer at some point because                  
  I think it is relevant to the issue of whether we're being                   
  fair or unfair."                                                             
  Number 475                                                                   
  MR. BOTELHO commented, "I think that's an important                          
  question, and it's one I think all of you have raised at one                 
  point or another, individually, and appropriately so.  Our                   
  tax structure, that is to say, first, how we resolve tax                     
  disputes, is one of three major models used by all the                       
  states.  You have some states that have tax courts rather                    
  than an administrative tribunal within the Department of                     
  Revenue or sometimes called the Department of Tax, or                        
  Taxation, or Franchise Board.  You have a third model, which                 
  is an administrative body, but placed somewhere outside of                   
  your tax collecting agency itself.  Alaska is very much                      
  within the norm there.  With regard to the statute of                        
  limitations, ours is very similar and, as I said, the                        
  doctrine of relation back is one that is generally accepted                  
  around the country and in that sense I think quite fair.                     
  There is no doubt that by asking you to say that                             
  retroactively we are right, is something unusual, especially                 
  to carry back this far.  The law, I think, is clear, and I                   
  think if you were to ask your legislative counsel, they                      
  would advise you, as our own research has shown, that you                    
  clearly have the authority...there are no constitutional                     
  "The fact that there are delays in our tax system that drag                  
  out so long are actually also fairly typical.  When we were                  
  before the Senate Labor & Commerce Committee, that very                      
  question was asked.  Staff for the committee made inquiry to                 
  other oil-producing states which responded that they too had                 
  cases that were dragging on.  We've got examples, in                         
  California, I think, of a recent settlement that went back                   
  to 1962.  It's not unusual when you're talking about the                     
  hundreds of millions of dollars at stake, they're the                        
  largest kinds of cases you'll find in any court system, they                 
  will be strenuously litigated.  You'll find the best lawyers                 
  in the country fighting on both sides, frankly; that tends                   
  to drag these out.  And it's simply a recognition that                       
  probably the length of time will be directly proportional to                 
  the amount at stake and the complexity of the issue.   That,                 
  I think, is what we've been faced with here.                                 
  "The most difficult part, though, is I think the key                         
  question:  what message are we sending?  This Administration                 
  sees that the industry is a key ingredient to the state, and                 
  that it's in our interest to make sure that it is as healthy                 
  as it can be, and that we ourselves contribute to that.   In                 
  that regard, it is important to try and bring the past to a                  
  resolution as quickly as possible.  It is also fair to the                   
  people of the state, that we collect what we're fairly owed.                 
  Not a dollar more, but probably not a dollar less, either.                   
  And I think the industry appreciates that.  I will tell you                  
  that I have dealt with, I think, virtually every major                       
  producer in this state, and I've never heard a company say,                  
  `We want to pay less than what we think we owe.'  I think                    
  for the most part they have been very receptive, and they                    
  understand that there is a process for resolution.  But                      
  we've also allowed years to drag out, here, and it's become                  
  a thorn to the industry.  Our goal has been to try and force                 
  it to resolution.  Our view had been that with passage of                    
  the bill it would force the remaining taxpayers -many of                     
  them have paid up all those taxes that might be affected by                  
  statute of limitations, but there are some who have not - by                 
  passing the bill it would force us to bring it to early                      
  resolution rather than waiting a month, or several months,                   
  or a year, for a Supreme Court decision.                                     
  "The final analysis is really it's a state of mind.  Can the                 
  industry see that what we're trying to do is clear up the                    
  past and also remove impediments to certainty for the                        
  future?  And I think the committee substitute that we                        
  proposed is really one that deals frankly, forcefully, with                  
  the past; it provides us with some pressure to bring it to                   
  resolution; it creates some incentives to bring it to                        
  resolution; but, finally, make some changes that will                        
  benefit the entire industry and bring certainty, even those                  
  that we're not otherwise in contention with right now.  And                  
  the five year statute does that.  The definition that deals                  
  with gas liquids, providing a methodology in the future for                  
  oil and for gas, will go a long way to eliminating a battle                  
  generating today that we'll be duking out ten years from                     
  now.  It won't have to happen again.  We don't want it to                    
  happen again.                                                                
  "Mr. Chairman, again, I know I've taken up a lot more time                   
  than you had hoped.  I appreciate the opportunity to address                 
  Number 587                                                                   
  CHAIRMAN VEZEY thanked Mr. Botelho for his testimony.  "I                    
  would like to clarify, if this was to become law, you're not                 
  thinking that we would not be auditing all of these                          
  companies, still?"                                                           
  Number 591                                                                   
  MR. BOTELHO said, "No, Mr. Chairman, I think the level of                    
  auditing goes to a whole different realm.  My sense would be                 
  that there would not be a need for the massive amounts we're                 
  spending on litigation.  I think it might mean some                          
  reduction in staff, it would certainly mean for the                          
  Department of Law elimination of outside counsel.  We                        
  obviously still have a backlog to clean up, and it's going                   
  to be a couple more years before we've accomplished that.                    
  But you have great leadership in the Department of Revenue.                  
  They've made great strides, I think, in catching up on the                   
  more recent years, so we will not see the gaps.  We're                       
  fighting history, right now.  And we have a chance to                        
  eliminate duking out 1978, 1979, 1980."                                      
  Number 611                                                                   
  CHAIRMAN VEZEY again thanked Mr. Botelho for his time,                       
  saying he knew he had a busy schedule and needed to leave.                   
  Mr. Botelho thanked Chairman Vezey once again.                               
  Number 616                                                                   
  REPRESENTATIVE B. DAVIS asked, "Mr. Chairman, is it your                     
  desire that we move the CS?"                                                 
  CHAIRMAN VEZEY responded, "Not at this time, Representative                  
  Davis.  We have a number of people who would like this                       
  opportunity to testify.  The Senate was kind enough to let                   
  us have this room until 4:00.  It is 4:00.  The Senate                       
  doesn't seem to be wanting the room quite yet, so I'd like                   
  to continue the meeting for a little while, though we are                    
  supposed to go in session at 4:00.  So I think we have maybe                 
  a few more minutes.  But not terribly many.  We had several                  
  people sign in to testify.  I can't find my sign-in sheet at                 
  this time.  But one of the names I do remember was Mr. Walt                  
  Furnace.  Are you still with us, Mr. Furnace?  He's not with                 
  us right now?  He was.  Okay.  Would someone who has signed                  
  in to testify - let's see, here's one right here.  This is -                 
   there we go.  I'm sorry?  Representative Kott?  I can't                     
  read this one.  This Mr. Paul Wessells?  Is Mr. Paul                         
  Wessells here?  Mr. Wessells?"                                               
  TAPE 94-56, SIDE A                                                           
  Number 000                                                                   
  CHAIRMAN VEZEY said, the committee understands that you                      
  probably have not had a chance to review the committee                       
  substitute before us, so we'll understand that.                              
  ASSOCIATION (AOGA) TAX COMMITTEE, testified on behalf of the                 
  committee.  He said, AOGA's trade association, whose 18                      
  member companies account for the majority of the oil and gas                 
  exploration, production, transportation and marketing                        
  activities in Alaska.  Those provisions of SB 377 that would                 
  amend the three-year statute of limitations on assessments,                  
  that is AS 43.05.260, and the six-year statute of                            
  limitations on collections of tax, that is AS 43.05.270,                     
  would retroactive affect to January 1, 1976, are in                          
  substance the same provisions contained in SB 185.  They                     
  were added to SB 377 as a floor amendment in the Senate.                     
  AOGA testified strongly against SB 185 during the hearings                   
  by the Senate Labor and Commerce Committee on March 22 and                   
  April 7 of this year.  Rather than repeat those comments                     
  before this committee, Mr. Wessells distributed copies of                    
  that testimony to committee members for their review.                        
  MR. WESSELLS said for the reasons given in that testimony,                   
  AOGA opposes those provisions, i.e., the retroactive                         
  provisions.  They represent bad policy for the state of                      
  Alaska, enacting them will be a terrible precedent, and will                 
  send a hostile message about Alaska to those who are already                 
  invested here and those who might be thinking about it.                      
  MR. WESSELLS thanked the committee for the opportunity to                    
  Number 050                                                                   
  CHAIRMAN VEZEY said he thought everyone in the room was                      
  concerned that we do have vast untapped oil and gas                          
  potential in the state of Alaska and nobody wants to see us                  
  run those people with the capital and the technology out of                  
  the state of Alaska, but at the same time, there's an                        
  ultimate fairness, and that's what we're searching for.                      
  Number 059                                                                   
  REPRESENTATIVE HUDSON asked Mr. Wessells if he had seen and                  
  if his comments were based on the revised elements that were                 
  brought forward by the Attorney General just recently.                       
  MR. WESSELLS responded no, they were not.  He said he was                    
  testifying on behalf of AOGA, who has not taken a position                   
  with respect to those items.                                                 
  CHAIRMAN VEZEY said he would not expect that the Board of                    
  Alaska Oil and Gas Association would not have had time to                    
  review this committee substitute.                                            
  Number 069                                                                   
  REPRESENTATIVE ULMER asked Mr. Wessells if he would answer                   
  the two questions that she had asked of the commissioner of                  
  revenue and the attorney general.  First, doesn't this                       
  simply bless the status quo.  When you say it's a terrible                   
  precedent, it seems that your interpretation is that this is                 
  changing business as opposed  to the Administration's                        
  testimony that it is continuing the status quo.  Second,                     
  does this make Alaska significantly different than other                     
  states where we have oil development and oil taxation and                    
  the difference between Alaska and those other states, making                 
  us perhaps less competitive, the message, issue that you                     
  were raising, is this so very different from other states.                   
  MR. WESSELLS responded on the first item of status quo, he                   
  thinks that what is referred to today as the status quo, is                  
  referring to a method of operation that the Department of                    
  Revenue has followed for a number of years.  He said, "It's                  
  not clear that is correct under the law of these particular                  
  statutes of limitation.  In particular, the three-year                       
  statute of limitations on assessments, is a subject that is                  
  before the Supreme Court presently for a decision and                        
  presumably, if it's there, then there is some controversy                    
  about whether this practice is correct or not.  So, I can't                  
  really see that it would be something regarded a status quo,                 
  or an accepted status quo."                                                  
  Number 100                                                                   
  REPRESENTATIVE ULMER said, "You're saying it may not be                      
  legal in the sense that the court may throw it out, or may                   
  not interpret it the way the Department of Revenue has used                  
  it.  My question is do you disagree that that is what has                    
  been the practice in Alaska for at least 10 years.  In other                 
  words, I'm trying to get at this issue of `are we changing                   
  the rules, or is this how business has been done for 10                      
  years in Alaska,' I'm trying to get some help with that                      
  MR. WESSELLS responded that the practice that's referred to                  
  here is the status quo being an interpretation of the three-                 
  year statute of limitations which says that it is suspended                  
  during the course of an appeal by a taxpayer of an                           
  assessment, and indeed, that has been the interpretation                     
  which the Department of Revenue has placed on that statute                   
  during this period of time.  He further stated, because they                 
  have interpreted it that way does not mean that the                          
  taxpayers who are subject to these taxes necessarily agree                   
  with that interpretation.  So, it has been an issue of                       
  controversy for some time and this bill attempts to settle                   
  that controversy, legislatively, on the presumption that                     
  this is an accepted practice and this is what the law really                 
  means and really is, rather than having that particular                      
  controversy decided by the Supreme Court.  Mr. Wessells said                 
  if what you mean by the status quo is a practice that the                    
  Department of Revenue is undertaken, I think that is                         
  correct.  But speaking for the members of the Alaska Oil and                 
  Gas Association, Mr. Wessells said they don't believe that                   
  is a correct way to operate.                                                 
  In response to Representative Ulmer's second question                        
  regarding how Alaska differs from other states, MR. WESSELLS                 
  said he couldn't speak for all the members, because he                       
  hadn't polled them on this particular question; however,                     
  speaking for the company that he is employed by, which is                    
  British Petroleum, he said at present they do not have any                   
  controversies with any other state that are as old as the                    
  ones that they have with the state of Alaska, nor have been                  
  as long-standing as these and stated he thinks that for the                  
  preponderance of the membership of the Alaska Oil and Gas                    
  Association, that is true, as well.                                          
  Number 143                                                                   
  REPRESENTATIVE ULMER said, "But you're not sure if the law                   
  is significantly different in those other states than what                   
  Alaska is proposing here that might make us look very                        
  different to the oil industry."                                              
  MR. WESSELLS responded he didn't think it's really a                         
  question of whether the law is different so much as it's the                 
  practice of determining tax liability and the procedures                     
  that are followed by the Department of Revenue in                            
  determining that liability, which causes the process to be                   
  protracted, very difficult to draw closure on and it is that                 
  particular problem which sticks out in the minds of people                   
  when they think about doing - at least the people in his                     
  company - when they talk about doing business in Alaska.                     
  It's the question of clarity and closure on the                              
  controversies regarding taxes that go back as far as 16 or                   
  17 years.  That's the problem.                                               
  Number 160                                                                   
  CHAIRMAN VEZEY said one of the questions that keep coming up                 
  in his mind is some, if not most of these problems have                      
  existed back to 1978 when the tax (indiscernible) was                        
  enacted, there are tax statutes that have been amended, he                   
  thought eight times during that course of time, most of them                 
  more than a decade ago, why this impetus for this change                     
  comes up now after all these periods of years?  He said he's                 
  starting to get the impression it's because we've not been                   
  able to resolve all these very old disputes.  He asked Mr.                   
  Wessells to comment on why this is all of a sudden coming                    
  up, when we've not hesitated in the past to go in and change                 
  the tax codes, and now suddenly we feel we need to change                    
  the retroactive portion, which we didn't bother to address                   
  in the eight previous changes.                                               
  MR. WESSELLS said he could only speculate about that because                 
  he's not the party that's proposing the change and thought                   
  the question needed to be directed to someone else.  He                      
  stated he didn't feel it was appropriate for him to                          
  speculate on that motivation.                                                
  Number 182                                                                   
  REPRESENTATIVE HUDSON asked Mr. Wessells the same question                   
  he asked the Commissioner; that is, under current law, the                   
  statute of limitations is three years, in which the                          
  department can assess and change assessments and things of                   
  that nature, and then it halts.  He asked, "Is there in any                  
  other state, to your knowledge or even here, is it all or                    
  nothing at all at that point in time.  That is, if the                       
  matter hasn't been fully settled, does the oil industry owe                  
  nothing, does the company owe nothing, or do they owe at the                 
  least, what they filed?"                                                     
  MR. WESSELLS said absolutely.  He said, "The process as it                   
  works is a taxpayer prepares and files a return as of a                      
  certain date.  This three-year statute that we're talking                    
  about begins to run so to speak, as of that date, it is                      
  three years from that time that the Department of Revenue                    
  can assess, that is make a claim and a demand for payment of                 
  additional tax.  What we're talking about here is additional                 
  tax.  It is that that the three-year statute refers to.  So,                 
  it's not a question of taxpayers not paying anything,                        
  they've indeed paid quite a lot."                                            
  Number  204                                                                  
  REPRESENTATIVE HUDSON said that was what he was asking                       
  before, and he got the impression that it was all or nothing                 
  at all.  That's been his big concern.  He said, if he was                    
  understand Mr. Wessells correctly, up to the three years,                    
  the initial taxpayer's filings and the various increases                     
  that are assessed by the department, puts a value that the                   
  department claims and puts a value that the company claims                   
  and is there any chance that the value at least that the                     
  company claims, is going to be lost to the state?  The state                 
  is not going to lose everything?                                             
  MR. WESSELLS commented that if Representative Hudson's                       
  understanding was, for instance, taking a particular tax                     
  period of one year, a taxpayer files its return and pays the                 
  tax as reported on that return, because of these statutes of                 
  limitations (indiscernible), it does not mean that the                       
  taxpayer can get that money back if they run.  That money                    
  has been paid in and that cannot be recovered, unless the                    
  taxpayer files a claim for refund of that money.  He said,                   
  "In this three year assessment, we're talking about claims                   
  for additional tax owed or claimed to be owed by the state,                  
  in addition to those that were actually reported in the                      
  Number 223                                                                   
  REPRESENTATIVE HUDSON asked about the six years.  He said,                   
  "we're out here three years, the state's got a value, the                    
  company's got a value, there's a period of time where                        
  apparently, at the end of the six years, then is there a                     
  chance that under existing law, the state could lose                         
  Number 227                                                                   
  MR. WESSELLS, responded no, it would only lose those amounts                 
  that  were included in the assessment that was made within                   
  the three year period.                                                       
  REPRESENTATIVE HUDSON commented that was different than what                 
  he understood from the department.                                           
  Number 231                                                                   
  CHAIRMAN VEZEY asked Mr. Wessells if he had any insight                      
  regarding his comment that he was not aware of any other                     
  state that has this kind of backlog of audits and                            
  MR. WESSELLS said in his experience, yes.                                    
  CHAIRMAN VEZEY asked Mr. Wessells to comment or elaborate on                 
  MR. WESSELLS stated that he was familiar with the                            
  controversies here in Alaska.  He stated, "In our particular                 
  experience with my company, we've had controversies with                     
  other states, but they've not, in the time that I've worked                  
  for the company, I'm not aware of any that have gone on as                   
  long as 10 to 15 years.  That's all I can say."                              
  CHAIRMAN VEZEY thanked Mr. Wessells for his testimony.                       
  CHAIRMAN VEZEY adjourned the meeting at 4:16 p.m.                            

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