Legislature(1993 - 1994)

03/12/1994 10:05 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                                                                               
  SENATE BILL NO. 261                                                          
                                                                               
                                                                               
       An  Act  relating  to  municipal  sales and  use  taxes                 
       involving air carriers; and providing for  an effective                 
       date.                                                                   
                                                                               
  Co-chair  Pearce directed  that  SB 261  be  brought on  for                 
  discussion  and referenced the Senate Community and Regional                 
  Affairs  Committee  Substitute;  sponsor  statement;  fiscal                 
  notes; opposition papers from  the Alaska Municipal  League,                 
  Haines Borough, and City of St.  Mary's; a position paper by                 
  the air  carriers in  support of  the bill; and  information                 
  from both the FAA and U.S. Dept. of Transportation.  The Co-                 
  chair further directed  attention to a work  draft committee                 
  substitute (8-LS156\R, Cook,  3/11/94), proposed by  Senator                 
  Sharp, as well as a proposed letter of intent.                               
                                                                               
  Senator  Sharp  MOVED for  adoption of  CSSB 261  (Fin), "R"                 
  version, for discussion purposes.   No objection having been                 
  raised, the "R" version of CSSB 261 (Fin) was ADOPTED.                       
                                                                               
  Senator Sharp  explained that CSSB  261 (Fin) adds  the word                 
  "air" before  transportation in  title language  at page  1,                 
  line 1, and  within the body of  the bill at line 10.   That                 
  ensures that  the legislation  addresses air  transportation                 
  rather  than auxiliary  transportation  provided  by an  air                 
  carrier on the  ground. The new  draft also adds  subsection                 
  (b) to the previously included (e) under 49 U.S.C. App 1513.                 
  That section reassures  that municipalities may  continue to                 
  charge property taxes,  income taxes,  franchise taxes,  and                 
  sales and  use taxes  on the  sale of  associated goods  and                 
  services provided  by air  carriers.   It further  reassures                 
  that  the   right  of  municipalities  or   other  political                 
  subdivisions that own or operate airports to levy or collect                 
  reasonable rental  charges, landing  fees, or  other service                 
  charges from aircraft operators is not infringed upon.                       
                                                                               
  The Senator spoke to past efforts to tax passenger fares and                 
  freight  in  intrastate  commerce.   The  intent  of federal                 
  legislation, as evidenced  in recent court rulings,  is that                 
  that is not allowable.  The proposed  bill clarifies federal                 
  law.                                                                         
                                                                               
  Senator  Sharp  further noted  deletion  of  the retroactive                 
  clause from previous versions  of the bill and  advised that                 
  CSSB 261 (Fin) would become effective immediately.                           
                                                                               
  Senator Kelly referenced information from the Haines Borough                 
  indicating  that  the   borough  applies  a  sales   tax  on                 
  intrastate freight.  He then asked  if the bill would impact                 
  ability  to  continue to  collect  the tax.    Senator Sharp                 
  concurred that it would.  He  reiterated that the purpose of                 
  federal legislation is to ensure  that regional areas do not                 
  add  costs  within  their  particular  area  that  would  be                 
  transferred  outside  the  region in  terms  of  freight and                 
  passenger service.  Senator Kelly pointed to language within                 
                                                                               
                                                                               
  the position paper stating that the FAA Act of 1958 does not                 
  prohibit  municipalities  from  assessing  the  sales   tax.                 
  Senator  Sharp  advised  that  federal  law  is clear.    He                 
  suggested  that if  the Haines sale  tax is  challenged, the                 
  borough might face return  of tax moneys.   Such a tax  tips                 
  the  economic  balance of  shipping  freight and  passengers                 
  between locales on federally certificated airlines.  Senator                 
  Kelly voiced discomfort  over "stripping"  the tax from  the                 
  borough.                                                                     
                                                                               
  CRYSTAL  SMITH,   Alaska  Municipal   League,  came   before                 
  committee in opposition to the  bill.  She refuted  comments                 
  that  the  bill merely  clarifies  federal law.   Statements                 
  embodied  in  correspondence  from  general  counsel,   U.S.                 
  Department  of Transportation,  and  court rulings  indicate                 
  that  the  proposed  bill would  go  beyond  federal law  in                 
  prohibiting municipalities from  levying a sales tax  on the                 
  carriage  of  freight.    Ms.  Smith directed  attention  to                 
  language within the League position paper and noted comments                 
  by Alaska Superior Court Judge Jonathan M. Link in Homer Air                 
  vs. Kenai Peninsula Borough et  al.  The preliminary  ruling                 
  indicates that Section 1513 of the Federal Aviation Act does                 
  not prohibit  sales tax  on the  transportation of  freight.                 
  Ms.   Smith  noted   instances  where   municipalities  have                 
  attempted to impose such a tax and were told by air carriers                 
  that  the  tax  was contrary  to  federal  law.   Given  the                 
  financial resources of  a small municipality versus  the air                 
  carriers,  the  municipalities have,  in most  cases, backed                 
  down.  However, the Haines Borough is successfully levying a                 
  tax, based on opinions from  city attorneys, per information                 
  from the FAA, that the tax is allowed under federal law.                     
                                                                               
  The situation at St. Mary's whereby  the city seeks to place                 
  a  sales  tax on  shipments of  raw  fish through  the local                 
  airport brought this  issue to the  fore.  Air carriers  are                 
  fighting the tax which would provide approximately $100.0 in                 
  revenue to the city.  The city is presently negotiating with                 
  air carriers.  Passage of the proposed bill would render the                 
  issue moot.                                                                  
                                                                               
  Ms. Smith reiterated  opposition to  the bill, advised  that                 
  issues surrounding freight are not clear, and requested that                 
  the matter remain open.  She  acknowledged that fiscal notes                 
  evidence little impact.  The proposed bill involves  "one of                 
  those prospective things where you're  cutting off an option                 
  for municipalities to impose  a tax that might help  them in                 
  times of other declining resource situations."                               
                                                                               
  Senator Sharp asked if information from the Alaska Municipal                 
  League was made  known to  House members furthering  similar                 
  legislation.  He also asked  that he be provided information                 
  from the FAA (evidencing  that the Haines tax is  legal) and                 
  inquired concerning how  much revenue had been  collected up                 
  to this time.  Ms. Smith  explained that she spoke with  the                 
                                                                               
                                                                               
  city clerk and  treasurer prior to consideration of the bill                 
  in the  House.  She  acknowledged that she did  not, at that                 
  time, have anything in writing from the Haines Borough.  She                 
  further referenced correspondence  from the FAA to  the City                 
  of Yakutat and from the U.S. Department of Transportation to                 
  counsel for a number of small municipalities indicating that                 
  "taxes  on  the  intrastate  air  carriage of  property  are                 
  permissible."                                                                
                                                                               
  Senator  Rieger  asked if  all  commercial air  carriers are                 
  federally  certificated.      Senator   Sharp   voiced   his                 
  understanding  that federal  law  applies  to all  federally                 
  certificated  airlines   and  those   operating  under   FAA                 
  regulations.    That  would include  "everybody  that  has a                 
  commercial license."                                                         
                                                                               
  HAROLD  JONES,  City  Council  Member,  next  testified  via                 
  teleconference from  Bethel.   He voiced  opposition to  the                 
  bill and  support  for  the position  taken  by  the  Alaska                 
  Municipal League.  Bethel is  considering an ordinance for a                 
  use tax on alcohol.  Air freight is the only means  by which                 
  alcohol, sold in  Anchorage and  elsewhere, is brought  into                 
  Bethel.  While the  tax will be upon the consumer,  the city                 
  is  reviewing  the  possibility of  having  the  air carrier                 
  collect the tax for remission to the city.                                   
                                                                               
  Bethel spends  approximately  $1.4  million  on  its  police                 
  department each year.  The town  of 5,000 is the hub village                 
  for 25,000 people.  The tax base consists of a 5% sales tax.                 
  The proposed use tax would help offset some of the losses in                 
  revenue from the state.  The city is looking specifically at                 
  a  use  tax on  alcohol  because  it is  the  cause of  many                 
  problems.    Since the  airlines  are bringing  alcohol into                 
  Bethel, it seems  logical to  have them collect  the tax  on                 
  those who ship it.                                                           
                                                                               
  Senator  Rieger asked if the  city assesses dockage fees for                 
  water transportation into  Bethel.   Mr. Jones advised  that                 
  the  port is  a  state facility.   He  added  that the  city                 
  imposes wharfage and dockage fees.  Senator Rieger suggested                 
  that a similar fee be levied at the airport.  Mr. Jones said                 
  the city intends to tax the product rather than the freight.                 
  There  is  concern  that  the  proposed  bill  will  prevent                 
  collection of the  use tax.  Mr. Jones noted  that the state                 
  has "complete jurisdiction  over our  airport;" the city  is                 
  not involved.                                                                
                                                                               
  Senator Sharp voiced  concern over  selective taxation of  a                 
  particular  commodity.   He  then  asked what  would prevent                 
  other  communities from  levying  a  similar  tax.    As  an                 
  example, he asked what would  happen should Anchorage levy a                 
  5% sales tax on  all freight leaving the municipality.   The                 
  prime purpose  of the  bill is  to prevent  one region  from                 
  jeopardizing  the economic  shipment of  freight to  another                 
                                                                               
                                                                               
  region within  the state  or between  states.   That is  the                 
  thrust of federal legislation.                                               
                                                                               
  CARRIE WILLIAMS,  former City  Manager of  St. Mary's,  next                 
  spoke via teleconference from Anchorage.  She voiced concern                 
  over  lost  revenues  to  bush  communities  resulting  from                 
  prohibiting sales and  use taxes.  Speaking  specifically on                 
  behalf of St. Mary's, Ms. Williams noted past receipt of raw                 
  fish taxes from fisheries in the  area.  Those revenues have                 
  now  been  lost.   Rural  communities have  had  to maintain                 
  police departments and roads and have nominal revenues.  St.                 
  Mary's has a  $2.5 million budget.   Loss of ability to  tax                 
  freight service on the 5,200 tons of raw fish shipped out of                 
  the community would total $88.0.  The contention is that use                 
  of  the  airport for  shipment  is  a basic  service  of the                 
  community.    A  small  roadhouse,  restaurant, and  lodging                 
  facility pay a  sales tax.   Airlines derive a benefit  from                 
  revenues.  Just as  ground taxi service is a  taxable entity                 
  in  St. Mary's, air taxi  operations and freight should also                 
  be taxed.  There is no distinction between that and wharfage                 
  fees for use of the dock.                                                    
                                                                               
  Ms. Williams observed that in  discussion with air carriers,                 
  the carriers are not able to adequately defend the fact that                 
  intrastate trade is  tax exempt.   City  attorneys have  not                 
  found referenced  cases particularly adequate in  defense of                 
  carrier contentions.  Bush communities  are asking that they                 
  be allowed to tax, at local  rates, sales of services out of                 
  their communities.   The tax  at St. Mary's  is intended  to                 
  recoup lost raw  fish tax revenues  and cover the impact  on                 
  airports and community services.                                             
                                                                               
  TIM  TROLL, City  Administrator/City  Attorney, Sand  Point,                 
  Alaska, next  testified via  teleconference from  Anchorage.                 
  He  voiced support for the position  of the Alaska Municipal                 
  League.   He reference a recent Anchorage Daily News article                 
  which indicates need  for the proposed legislation  to avoid                 
  potential  litigation   brought  by   the  fact   that  city                 
  administrators  "are  always  looking  at  this  area  as  a                 
  possible source  of new revenue."  Mr.  Troll suggested that                 
  the legislation  would lead  to more  litigation because  it                 
  will create a "whole  new area of state jurisprudence  as to                 
  exactly what  was meant  and how  extensive this  particular                 
  provision would go."  Will it prohibit Bethel from levying a                 
  use tax on alcohol imported into the community?                              
                                                                               
  Mr. Troll suggested that if the  position of air carriers is                 
  that  the proposed bill  merely makes clear  what is already                 
  clear in federal law that freight service is exempt, perhaps                 
  the bill should simply state:                                                
                                                                               
       Notwithstanding other provisions of law, a municipality                 
       may  not  levy  or   collect  a  tax  or  fee   on  the                 
       transportation of  individuals or goods by  a federally                 
                                                                               
                                                                               
       certificated air  carrier, except to the extent allowed                 
       by 49 U.S.C., Sec. 1513 (b).                                            
                                                                               
  Subsection (b) is the language communities claim  authorizes                 
  state and  political subdivisions to  "at least look  at the                 
  area of freight as a possible source of taxation."                           
                                                                               
  Mr.  Troll suggested  that  action on  CSSB 261  (Fin) would                 
  result  in  passage   of  bad   law  and  special   interest                 
  legislation.  It would  further restrict municipalities that                 
  are receiving less from the state  and being told to be more                 
  responsible   locally.     Mr.  Toll   suggested  that   the                 
  legislature review methods to even the tax load rather  than                 
  pass bad  legislation.   He noted  that most  states have  a                 
  state sales tax  which alleviates the problem  of intrastate                 
  taxes  among  communities.    A  level playing  field  might                 
  include a state tax that is shared back with municipalities.                 
  That would be precluded if the proposed bill is passed.                      
                                                                               
  End:      SFC-94, #30, Side 1                                                
  Begin:    SFC-94, #30, Side 2                                                
                                                                               
  REED STOOPS  next came  before committee  on  behalf of  the                 
  Alaska Air Carriers Association.   He voiced support for the                 
  legislation.  He explained  that while federal law  is clear                 
  as to what is and is not taxable in commercial aviation, the                 
  benefit  of  the  proposed  bill   is  to  avoid  additional                 
  litigation.                                                                  
                                                                               
  Mr. Stoops directed attention to  correspondence to and from                 
  the U.S. Department of Transportation.  He noted language in                 
  October  2,   1986,  correspondence   from  the   department                 
  indicating that  taxes on passengers and  interstate freight                 
  are  not  permissible.     That  is  intended   to  prohibit                 
  regulation   of   interstate   commerce--a  normal   federal                 
  preemption.  Further, federal taxes on those services accrue                 
  to  the  federal airport  trust  fund, and  trust  funds are                 
  returned to  states for airport  improvements.  Alaska  is a                 
  beneficiary of the system.  The state actually collects more                 
  in trust funds than it pays in taxes.                                        
                                                                               
  The  only  area  that  general  counsel indicated  might  be                 
  eligible for taxation is intrastate air freight.  Subsequent                 
  to the correspondence,  the circuit  court in Florida  ruled                 
  that intrastate air cargo is also exempt from taxation.                      
                                                                               
  Federal  law   is  clear.     Litigation   costs  for   both                 
  municipalities  and  air carriers  should  be avoided.   The                 
  proposed bill would be beneficial to that end.                               
                                                                               
  Speaking to  the situation  at Haines,  Mr. Stoops  observed                 
  that  the  fiscal  note  from  the Dept.  of  Community  and                 
  Regional Affairs indicates  nominal collection of tax.   The                 
  air cargo tax is  not being paid by one or  two of the three                 
                                                                               
                                                                               
  carriers into Haines.   By virtue  of the Florida  decision,                 
  the tax could easily be overturned.                                          
                                                                               
  Mr. Stoops voiced his understanding that the City of  Bethel                 
  seeks to levy  a tax on  alcohol coming into the  community.                 
  He noted that Anchorage sales taxes  would cover the sale at                 
  the point of origin, and air freight taxes are prohibited by                 
  law.   It would thus not be  appropriate for the air carrier                 
  to collect the proposed tax.                                                 
                                                                               
  Addressing comments by  the city  administer of Sand  Point,                 
  Mr. Stoops suggested that the bill is  written as suggested.                 
  It   specifically   references   municipal  taxation   under                 
  "113(b)."    That  was  at  the  suggestion  of  the  Alaska                 
  Municipal League.   Federal Code section "113(b)"  speaks to                 
  areas in which  municipal or state  taxes can be  collected.                 
  It is not the  intent to deny municipal collection  of legal                 
  taxes such  as  landing fees,  fuel  flowage fees,  fees  on                 
  airline meals,  or fees  on indirect  services.  Mr.  Stoops                 
  reiterated   that   it  is   not   the  intent   to  deprive                 
  municipalities of collection  of legal  taxes under  federal                 
  law.                                                                         
                                                                               
  Mr. Stoops advised that federal  certificates referred to in                 
  the  legislation   encompass  Part   101  certificates   for                 
  scheduled air  carriers and  Part 135  certificates for  air                 
  charter operations.                                                          
                                                                               
  Crystal Smith again  came before committee on  behalf of the                 
  Alaska Municipal League.   She referenced February  5, 1993,                 
  correspondence from  general counsel at the  U.S. Department                 
  of Transportation and noted that it was issued subsequent to                 
  the Florida  decision.   It reiterates  the position  that a                 
  state tax and, by  extension, a municipal tax may  be levied                 
  on intrastate transportation of air property.  The  issue is                 
  not as clear  cut as  air carriers would  have one  believe.                 
  Senators Rieger and  Kerttula requested  copies of the  1993                 
  correspondence.                                                              
                                                                               
  Co-chair  Pearce called  for  additional  discussion of  the                 
  bill.   None  was  forthcoming.   She  then queried  members                 
  regarding disposition.  Senator Sharp  MOVED for adoption of                 
  the proposed letter  of intent,  advising that it  clarifies                 
  that the intent of the bill is to "make state law exemptions                 
  for what the federal law states."   No objection having been                 
  raised, the letter of intent was ADOPTED. Senator Sharp then                 
  MOVED  that  CSSB   261  (Fin)  pass  from   committee  with                 
  individual  recommendations, accompanied  by  the letter  of                 
  intent and three fiscal notes.  Co-chair Pearce called for a                 
  show of hands.   The motion carried with only  Senator Jacko                 
  objecting.   CSSB 261  (Fin) was  REPORTED OUT  of committee                 
  with the Senate Finance letter of  intent, zero fiscal notes                 
  from the Dept.  of Transportation and Public  Facilities and                 
  Dept. of  Community and  Regional Affairs,  and a  municipal                 
                                                                               
                                                                               
  fiscal note from the Dept. of Community and Regional Affairs                 
  indicating minimal loss.  Senator Sharp signed the committee                 
  report with a  "do pass"  recommendation.  Co-chairs  Pearce                 
  and Frank and  Senators Kelly,  Kerttula, and Rieger  signed                 
  "no rec."  Senator Jacko signed "Do not pass."                               
                                                                               

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