Legislature(1993 - 1994)
04/07/1994 01:50 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATOR KELLY brought SB 347 (LIMITED LIABILITY COMPANIES) before the committee as the next order of business. LARRY MEYERS, Director, Division of Income & Excise Audit, Department of Revenue, presenting a brief overview on limited liability companies, said they are hybrid, possessing both characteristics of corporate and partnership attributes. Under existing laws the State of Alaska does not tax partnerships, only corporations. SB 347 does not address the taxation method under limited liability companies. Of the 36 states that currently have this type of legislation enacted, the vast majority follow what the Internal Revenue Service has determined to be the taxable structure, which is partnerships. Absent any clarification from the Legislature, Alaska will adopt what the IRS determines as far as a taxable nature, which, in this instance, if it is a partnership it will be another entity that is not subject to being taxed. Mr. Meyers said because LLC's are relatively new there isn't a lot of history behind the tax impact. Several states have shown that it is revenue neutral. Most of the states that have adopted limited liability corporations also have individual income tax, and while these entities would not taxed at the LLC level, they would pick up the income at the individual level. Two states, like Alaska, do not have individual income tax, but the two states have treated LLC's as corporations, thereby subjecting them to being taxed at a corporate rate. Mr. Meyers related that the Department of Revenue has based its fiscal note on the assumption that over the last three years the Department of Commerce has registered 1,100 new corporations on an annual basis. However, the Department of Revenue has not addressed the conversion of existing C corporations into the LLC's; they have focused only on new corporations that would enter into the stream. Number 205 SENATOR KELLY asked if the Department of Revenue supports SB 347. LARRY MEYERS responded the department supports it in theory, however, their concern is the taxation method. SENATOR KELLY asked if in statute it could be treated as a corporation. LARRY MEYERS acknowledged that it could be done with a simple amendment in the definition of "corporation" that would include limited liabilities companies. Number 221 BRIAN DURRELL, a lawyer with the Anchorage law firm Bogle and Gates, testified from Anchorage in support of SB 347. He said he has been very active in the development of the LLC legislation through a working group of lawyers and accountants in Anchorage. Mr. Durrell said there are different business entities that organizers of businesses may select from in setting up Alaska businesses. They could select a sole proprietorship, joint ventures, partnerships, limited partnerships, S corporations or C corporations. Of those entities, the State of Alaska only has income tax against C corporations, and, consequently, if an organizer of a business chose an LLC form of business, there would be no tax revenues lost to the State of Alaska. He stated the only entity that is at issue today is a C corporation, and it is unlikely that many of those C corporations would reorganize into the form of an LLC. Mr. Durrell addressed several concerns he has with the fiscal note developed by the Department of Revenue. Number 315 SENATOR KELLY asked Mr. Durrell if he would continue to support the bill if a tax provision were added to the bill that would include an LLC under the definition of "corporation." BRIAN DURRELLL replied that he thought doing so would have a detrimental effect on the legislation because the purpose of the legislation is to have the limited liability business entity that has the partnership method of taxation and that would be a substantial impact on that. Number 342 JOHN HOFFER, an attorney with the Anchorage law firm Fortier and Mikko, voiced his support for SB 347, primarily because he sees a lot of clients that would like to organize as an LLC, but they cannot do so. Many small businesses do not consider organizing as C corporations primarily because of the risk of double taxation at the federal level so they are faced with a choice of organizing either as a general partnership, or a limited proprietorship, or an S corporation. In his view, the people who are going to be looking at this legislation and deciding whether they want to organize as an LLC, or a partnership, or an S corporation, are the kinds of businesses that are not going to be subject to tax under current Alaska law anyway, so there is really very little potential of revenue loss with this LLC bill. Mr. Hoffer pointed out that other states that subject LLC's to income taxation do it because they also have a personal income taxation and they don't want the LLC to be a loophole whereby a new business entity can escape taxation. He believes it would be inappropriate for Alaska to have an income tax for LLC's and to leave the other ones untouched. Number 398 BOB MANLEY, representing the working group of members of the tax and business law sections of the Alaska Bar Association, as well as members of the Alaska Society of CPA's, stated he favors the legislation and disagrees strongly with the fiscal note prepared by the Department of Revenue. Mr. Manley believes that LLC's are going to replace S corporations and partnerships, but they are not going to take away any corporate income tax from the State of Alaska. Number 460 SENATOR KELLY closed the public hearing on SB 347, and stated it would be back before the committee at a later date.
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