Legislature(2003 - 2004)
03/24/2004 09:04 AM Senate FIN
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* first hearing in first committee of referral
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SENATE BILL NO. 366
"An Act relating to the levy and collection of sales and use
taxes, to the levy and collection of municipal sales and use
taxes, and to municipal sales and use taxes on alcoholic
beverages; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this bill, which is sponsored by the
Senate Finance Committee, would institute a statewide four-percent
sales tax on sales, lease, rental, and use of tangible property and
services within the State.
Senator B. Stevens moved to adopt committee substitute, Version 23-
LS1051\U as the working document. He then objected to the motion in
order to explain the changes in the committee substitute.
Co-Chair Wilken noted that Kathryn Kurtz, Legislative Counsel,
Division of Legislative Legal and Research Services, has provided a
Version "U" Sectional Analysis [copy on file], dated March 24,
2004.
Senator B. Stevens stressed that this is a working document and as
such would continue to evolve over time. Changes in Version "U"
include: the addition of three new sections to the list of
limitations on the powers of Home Rule municipalities to Section 5,
on page two, beginning on line seven.
Co-Chair Wilken interjected that numerous individuals have
indicated the desire to testify regarding this bill.
Senator B. Stevens expressed the understanding that this would be a
Committee work session with the goal of developing a new committee
substitute based upon Department and Member input. Therefore, he
asked that the hearing be limited to Committee discussion.
Co-Chair Wilken apologized for not clarifying that this hearing
would be a work session, as it is the bill's first hearing and "a
foundation on what we are talking about" must be established. The
Version "U" committee substitute was distributed to the public with
the understanding that public testimony would be taken at a later
date.
Senator B. Stevens explained that some of the changes incorporated
into the committee substitute would address concerns presented by
State departments, specifically the Department of Revenue. However,
not all of the concerns have been addressed, as this is a
continuing work in progress. In addition to changes in Section 5,
other changes include: language in Section 12, page three, line 27,
that would allow municipalities to adjust their local tax system in
order to qualify for the one-percent return the State would rebate
to the municipality; language in Section 16, subsection (7) on page
five, line 29 would provide an exemption for goods for resale by
the mining and manufacturing industry was added because it was
inadvertently omitted in the original committee substitute; the
reference to a local bed tax, were it separate from the local sales
tax, as specified under AS 29.45.700, in Section 16, subsection
Sec. 43.44.060. Relationship to municipal levies. on page six, line
29 would allow it to remain in place; language in Section 16, Sec.
43.44.060, subsection (c) on page seven, beginning on line 18 would
address the situation of two different taxation rates resulting
from a city within a borough by combining the two rates and then
splitting the revenue rebated to that taxing regime proportionately
between the two entities.
Senator Hoffman asked for further information regarding how the
State's one-percent tax rebate would be split between a
municipality and a borough.
Senator B. Stevens responded that the one-percent rebate would be
divided between the two entities depending on their individual tax
levies. A five-percent tax on behalf of the local entities would be
collected were a municipality to levy a two-percent tax and the
borough to levy a three-percent tax. One percent of the five
percent tax would be rebated and prorated proportionately between
the two.
Senator Hoffman understood therefore that the language specifically
defines how the split would occur as opposed to it being an
optional situation.
Senator B. Stevens responded that this would be the guideline for
any community that that a dual city/municipality taxation system.
Senator B. Stevens explained that other changes in Version "U"
include language in Section 16, Sec. 43.44.130. Authority to enter
streamlined sales and use tax agreement. on page nine, beginning on
line nine that "would permit the State to enter into a multi-state
sales agreements for catalog sales," and, were any agreement to
occur on the federal Congressional level regarding Internet sales,
this would allow the State to participate in that agreement. In
addition, this language would allow the purchase of a large ticket
item that is taxed in one of certain participating states to be
exempt from taxation in Alaska. He noted that this would prevent
"dual taxation," and he noted that these types of agreements
currently exist between some states.
Senator B. Stevens further explained that some issues not addressed
in this committee substitute include whether or not to establish a
sales tax limitation; or whether or not to exempt such things as
industrial equipment that is used in development or exploration or
transportation expenses as exampled by taxing items shipped on the
Alaska Railroad that would probably be taxed again when sold at the
retail level. He voiced support for exempting both of these
components. Another issue not addressed is whether or not to
incorporate penalties for non-compliance or non-enforcement
language.
Co-Chair Wilken asked whether Version "U" addresses the entirety of
the Department of Revenue concerns as detailed in the Department's
March 19, 2004 memorandum [copy on file] signed by Deputy
Commissioner, Steve Porter, and addressed to Senator B. Stevens.
Senator B. Stevens responded that Version "U" addresses most but
not all of the concerns. Efforts on how to address the remaining
concerns are continuing.
PHELAN STRAUBE, Staff to Senator Ben Stevens, informed the
Committee that efforts are continuing in regards to incorporating
into the bill, language, as suggested by Senator Hoffman, that
would allow a small business to withhold from submitting a tax
every 30 days as required, until such a time that the tax owed
amounted to a minimum of $250.
Senator B. Stevens noted that another area requiring further
discussion would pertain to a sixty dollar per transaction
limitation, specifically how it would affect existing local revenue
streams. He also noted that language exempting wages and interest
from taxation was also inadvertently omitted from the bill's
exemption list.
Senator Bunde asked whether the intent of the bill is to limit the
collection of tax to only those entities holding a State business
license as enforcing collection of the tax on such things as garage
sales would be an administrative nightmare.
Senator B. Stevens responded that Section 16, subsection (6)(A) on
page five, beginning on lines 25 would exempt the resale of
property if a purchaser resells the property, by itself or in
combination with other property, "in the ordinary course of
business."
Senator Hoffman stated that such things as garage sales could also
be exempted by language in Section 16, subsection (3) on page five,
line 17 that would exempt "occasional sales."
Senator B. Stevens concurred.
Senator Hoffman asked about his request to provide a senior citizen
sales tax exemption in the bill.
Senator B. Stevens responded that while this issue was discussed,
it was determined that the municipalities that currently exempt
senior citizens from taxation could address this on the local level
by utilizing the one-percent rebate to assist seniors or by
providing them a tax credit.
Senator Hoffman stated that he would support a senior citizen tax
exemption. For clarification, he pointed out that while one of his
requests was to exempt diesel fuel utilized in the generation of
electricity, the language in Section 16, subsection (5) on page
five, line 22, that exempts "the sale of natural gas, diesel fuel,
heating oil, water, electricity, steam, or refuse and garbage
collection service" would serve to exempt diesel fuel in its
entirety. He voiced that his suggestion limited the diesel fuel
exemption whereas the language as written would serve to provide a
disparity between gas users and diesel users.
Senator B. Stevens acknowledged the comment and stated that this
exemption would be revisited.
Senator Dyson opined that the endeavor to exempt industrial
machinery would be difficult as it would be a challenge to provide
this exemption to a specific industry such as the oil industry and
large construction projects but not consider exempting such things
as commercial fisherman or fish processors.
Senator B. Stevens responded that this had been considered without
resolution. However, it should be noted that while the four percent
tax might apply to every purchase, there is a maximum $60 tax
limit. This "ceiling," which could be described as an invoice sales
tax rather than an itemized sales tax, was included in the bill in
an attempt to address this concern.
Senator Dyson acknowledged the explanation.
Senator Olson asked how the tax would be applied to harvesters of
products, be it either fishermen harvesting from the sea or farmers
harvesting potatoes who might sell their products either on a
wholesale or retail basis.
Mr. Straube interjected that were a fisherman to purchase cans that
would be utilized in the process of his harvest, the purchase of
those cans would be exempt from the sales tax. Manufacturing
components would also be exempt from taxation under provisions of
this bill.
Senator B. Stevens continued that, the concept "is that any item
that is either sold or purchased in the process for total resale is
exempt." A borough would have the ability to implement a landed raw
fish tax, whereas the State would have the ability to tax the final
product where that product sold in the State. This sales tax would
not apply to a product manufactured in the State but sold outside
of the State.
Co-Chair Wilken suggested that the word "sewer" be added to the
list of exemptions in the aforementioned Section 16, subsection (5)
on page five, line 22.
Senator B. Stevens agreed that some of the activities specified in
that section might not be owned by a municipality.
Co-Chair Wilken affirmed that this is the case in the City of
Fairbanks.
Co-Chair Wilken asked regarding the status of the bill's fiscal
notes.
Senator B. Stevens responded that the adoption of the Version "U"
committee substitute would provide the Department of Revenue with
significant information with which to develop a fiscal note.
However, he requested that development of the fiscal note be
delayed until a new committee substitute that encompasses the items
that were inadvertently omitted from Version "U" is developed.
Co-Chair Wilken suggested that a separate estimate be developed
that would depict how much sales tax would be lost were senior
citizens exempted.
Senator Bunde asked the anticipated annual expense of administering
the program, as he was concerned that these expenses might outweigh
the revenue the tax would generate.
Senator B. Stevens understood that the Department has calculated
those figures.
ROBIN WILSON, Tax Division, Department of Revenue, testified via
teleconference from an offnet site and stated that while the
Department would work with Senator B. Stevens to develop a fiscal
note, it could not provide one at this time as the Committee has
some important decisions yet to make. The Version "U" committee
substitute has not been reviewed by the Department and language
regarding such things as the tax limitation could complicate the
development as it would affect costs. She assured however, that
once the exemption structure is clarified, a fiscal note would be
developed.
Senator B. Stevens withdrew his objection to the committee
substitute, with the understanding that a new committee substitute
would be provided in short order.
There being no further objection, the Version "U" committee
substitute was ADOPTED as the working document.
Co-Chair Wilken asked that the handout titled "State Sales Tax
Issue Primer" [copy on file], dated March 2004, that was developed
by the Alaska Municipal League (AML) be explained.
KEVIN RITCHIE, Executive Director, Alaska Municipal League, voiced
appreciation for the Committee's endeavors to address the State's
fiscal dilemma by considering a variety of revenue generating
options including a State sales tax.
SFC 04 # 56, Side A 10:39 AM
Mr. Ritchie stated that the AML would be available to assist the
Committee in this endeavor. He noted that the intent of the "State
Sales Tax Issue Primer" is to examine some of the impacts that
would result were a State sales tax implemented as well as to
acknowledge that this State is different from other states. Since
Statehood, even when times were tough, sales taxes have been
reserved to be a municipal tax, as it is recognized that many small
communities do not have any other viable option through which to
generate revenue aside from property taxation. He also noted the
wide costs of living variations in the differing regions of the
State is a consideration in this issue.
Mr. Ritchie noted that in response to questions pertaining to
revenue sources, AML would first recommend the use of the earnings
of the Permanent Fund and the adoption of the Percent of Market
Value (POMV) Program.
Mr. Ritchie declared that a "direct partnership" between
municipalities and the State must be sought regarding the
development of the fiscal notes, as the exemption list provided in
the bill is "a huge issue" that would affect both the State and
municipalities' sales tax revenues. He noted that the Kenai
Peninsula Borough and the City and Borough of Juneau currently are
the largest sales tax collection organizations.
Mr. Ritchie concluded his remarks by stating that AML would be
available to answer questions regarding the Sales Tax Primer and
would welcome participation in the continuing development of the
bill.
Co-Chair Wilken voiced appreciation for AML's assistance, the
Primer, and the suggestion to develop a Sales Tax Exemption
Commission.
Senator Olson assumed that from "the negative approach" presented
in the Primer that AML has a negative view of the State Sales Tax.
He asked whether the exemption approach would be more palatable to
municipalities were it to mirror exemptions currently in place at
the local level.
Mr. Ritchie responded that each area of the State is different and
that difference is reflected in each area's specific exemptions.
Beginning on page 16 of the Primer, there is a definition and an
overview of various communities' tax exemptions, and in short,
there are no common or uniform tax exemptions. He also clarified
that this non-uniformity also pertains to the tax limitation as
some municipalities have a limit on a total invoice while others
might apply it to a single purchase.
Senator B. Stevens complimented Mr. Ritchie and AML on the
information provided in the booklet. Continuing, he spoke to the
issue as depicted on page ten of the Primer in the section titled
"A State Sales Tax in Not Fair to Alaskans" which bases its anti-
tax position on the fact that the price of goods in rural
communities is substantially higher than that of urban communities.
While labeling this as a major policy call, he declared that he has
"yet to rationalize within my mind" a justification as to why it is
acceptable on the local level to tax products to fund local
government but it is labeled "unfair" for the State to tax those
same products. On the same subject, he noted that urban areas use
property taxes as a mechanism through which to fund government. He
noted that the State provides goods and services, including
education, "at a equal level" to all areas of the State be it urban
or rural.
Senator Bunde opined that the information on this page intimates
that the proposed Sales Tax would be unfair due to the fact that
because the price of an object such as milk is more expensive in
one area of the State, the purchaser would be required to pay more
tax. Continuing, he recalled testimony to the affect that, in one
areas of the State, a Permanent Fund Dividend check equates to
approximately 30-percent of the household income. Therefore, were
an income tax implemented, that area of the State would be paying
little or no income tax while another area of the State would be
paying substantially more. He opined, however, that the income tax
scenario is fairer than the sales tax scenario.
Senator Hoffman, furthering Senator Bunde's comments, stated that
what is relevant in an income tax scenario is that everyone in the
State is treated equally whether they are in an economically
depressed area or not. The problem with a State sales tax is that
the State would be receiving additional dollars from communities
where the price of things such as milk is higher. This differs from
the local tax scenario in that everyone in the community would pay
the local government the same tax amount. He stated that there is
fairness in a local sales tax as the individuals living within
those boundaries are treated equally. In conclusion, he agreed that
Rural areas would be treated unfairly were a Statewide sales tax
implemented.
Senator B. Stevens proclaimed that these discussions would
continue; however, he argued that the State sales tax would be fair
because it would be applied equally in all parts of the State
regardless of the different pay scales, expenses, and other
amenities. A State sales tax would be the most equitable thing that
could be applied across the State and furthermore, the areas that
are more affluent, spend more money and therefore would contribute
more money.
Senator Hoffman declared that it would be fair to tax on a per
gallon basis rather than a price per gallon basis. Therefore,
whatever one consumes, one pays for whether it be marine, aviation,
or motor fuel. He recognized this as being a fair taxation method
as opposed to the inequities presented by a State sales tax based
on price.
Senator Olson noted that contrary to State programs that provide
cost of living allowance considerations for the price of services
or employment, private business employees are not provided these
benefits.
Senator B. Stevens countered that private industry employees would
also not have the option to not pay local sales or property taxes
on such things as rent.
Senator B. Stevens stated that a new committee substitute would be
forthcoming.
Co-Chair Wilken stated that an opportunity for public testimony on
this bill would be forthcoming.
Co-Chair Wilken ordered the bill HELD in Committee.
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