Legislature(1993 - 1994)
05/14/1994 09:00 AM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
JOINT HOUSE STATE AFFAIRS STANDING COMMITTEE, HOUSE JUDICIARY STANDING COMMITTEE AND HOUSE SPECIAL COMMITTEE ON OIL & GAS May 14, 1994 9:00 a.m. HOUSE STATE AFFAIRS COMMITTEE MEMBERS PRESENT Representative Al Vezey, Chairman Representative Pete Kott, Vice Chair Representative Jerry Sanders Representative Fran Ulmer Representative Gary Davis Representative Bettye Davis Representative Harley Olberg HOUSE JUDICIARY COMMITTEE MEMBERS PRESENT Representative Brian Porter, Chairman Representative Jeannette James, Vice Chair Representative Gail Phillips Representative Pete Kott Representative Joe Green Representative Cliff Davidson Representative Jim Nordlund HOUSE SPECIAL COMMITTEE ON OIL & GAS MEMBERS PRESENT Representative Joe Green, Chairman Representative Pete Kott, Vice Chair Representative Gary Davis Representative Jerry Sanders Representative Harley Olberg Representative Joe Sitton OTHER LEGISLATORS PRESENT Representative Con Bunde Representative Bill Hudson Representative David Finkelstein Representative Tom Brice Representative Gene Therriault COMMITTEE CALENDAR SB 377: "An Act relating to state agency fiscal procedures, including procedures related to the assessment and collection of certain taxes; and providing for an effective date." PASSED HOUSE CSCSSB 377(STA) OUT OF COMMITTEE WITNESS REGISTER BRUCE BOTELHO, Attorney General State of Alaska Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 Phone: 465-3600 POSITION STATEMENT: Testified in support of SB 377 SPENCER HOSIE, Legal Counsel for the Department of Law 510 L Street Anchorage, Alaska 99501 Phone: None Given POSITION STATEMENT: Testified in support of SB 377 PAUL WESSELLS, Director of Tax BP Exploration, Alaska 900 E. Benson Blvd. Anchorage, Alaska 99519 Phone: None Given POSITION STATEMENT: Testified in opposition to SB 377 DARREL REXWINKEL, Commissioner Alaska Department of Revenue P.O Box 110400 Juneau, Alaska 99811-0400 Phone: 465-2300 POSITION STATEMENT: Testified in support of SB 377 RICHARD BREWER, Assistant Director Oil and Gas Audit Division Department of Revenue 15021 Longbow Anchorage, Alaska 99516 Phone: 176-1363 POSITION STATEMENT: Testified in support of SB 377 JIM PALMER Alaska Oil & Gas Association 121 W. Fireweed Lane Anchorage, Alaska 99501 Phone: 272-1481 POSITION STATEMENT: Submitted written testimony and commented on SB 377 RAGA ELIM, Legislative Liaison Office of the Governor P.O. Box 110001 Juneau, Alaska 99811-0001 Phone: 465-3500 POSITION STATEMENT: Commented on SB 377 PREVIOUS ACTION BILL: SB 377 SHORT TITLE: STATE AGENCY FISCAL PROCEDURES SPONSOR(S): FINANCE JRN-DATE JRN-PG ACTION 04/13/94 3633 (S) READ THE FIRST TIME/REFERRAL(S) 04/13/94 3633 (S) FINANCE 04/13/94 3650 (S) FIN WAIVED UNIFORM RULE 23 04/14/94 (S) FIN AT 09:00 AM SENATE FIN 518 04/20/94 (S) RLS AT 06:45 PM FAHRENKAMP ROOM 203 04/21/94 3839 (S) FIN RPT CS 6DP 1DNP SAME TITLE 04/21/94 3839 (S) FN TO SB & CS PUBLISHED (ADM) 04/21/94 3839 (S) ZERO FN TO SB & CS PUBLISHED (REV) 04/21/94 (S) FIN AT 10:00 AM SENATE FIN 518 04/21/94 (S) RLS AT 02:15 PM FAHRENKAMP ROOM 203 04/22/94 3870 (S) RLS RPT 3CAL 1NR 4/22/94 04/22/94 3876 (S) READ THE SECOND TIME 04/22/94 3877 (S) FIN CS ADOPTED Y12 N8 04/22/94 3877 (S) AM NO 1 MOVED BY KERTTULA 04/22/94 3882 (S) QUESTION: AM NO 1 GERMANE? 04/22/94 3883 (S) AM NO 1 GERMANE Y17 N3 04/22/94 3883 (S) AM NO 1 ADOPTED Y14 N6 04/22/94 3883 (S) AM NO 2 MOVED BY DONLEY 04/22/94 3884 (S) AM NO 2 FAILED Y9 N11 04/22/94 3884 (S) ADVANCED TO THIRD READING UNAN CONSENT 04/22/94 3884 (S) READ THE THIRD TIME CSSB 377(FIN) AM 04/22/94 3884 (S) PASSED Y16 N4 04/22/94 3885 (S) EFFECTIVE DATE PASSED Y17 N3 04/22/94 3885 (S) Pearce NOTICE OF RECONSIDERATION 04/22/94 3885 (S) TAKE UP RECON ON SAME DAY WITHDRAWN 04/22/94 3937 (S) RECON TAKEN UP SAME DAY Y18 N2 04/22/94 3937 (S) PASSED ON RECONSIDERATION Y16 N4 04/22/94 3938 (S) EFFECTIVE DATE SAME AS PASSAGE 04/22/94 3941 (S) TRANSMITTED TO (H) 04/27/94 3746 (H) READ THE FIRST TIME/REFERRAL(S) 04/27/94 3747 (H) STA, O&G, JUDICIARY, FINANCE 05/07/94 (H) STA AT 08:00 PM CAPITOL 102 05/07/94 (H) MINUTE(STA) 05/08/94 (H) MINUTE(STA) 05/13/94 (H) STA AT 09:00 AM CAPITOL 519 05/13/94 (H) MINUTE(STA) 05/14/94 (H) STA AT 09:00 AM CAPITOL 519 05/15/94 4412 (H) STA RPT HCS(STA) 1DP 4NR 2AM 05/15/94 4413 (H) DP: VEZEY 05/15/94 4413 (H) NR: SANDERS, OLBERG, G.DAVIS, ULMER 05/15/94 4413 (H) AM: B.DAVIS, KOTT 05/15/94 4413 (H) -PREV SENATE ZERO FN (REV) 4/21/94 05/15/94 4413 (H) REFERRED TO O&G 05/15/94 4413 (H) O&G REFERRAL WAIVED 05/15/94 4414 (H) JUD REFERRAL WAIVED 05/15/94 4414 (H) FIN REFERRAL WAIVED 05/15/94 4414 (H) RULES TO CALENDAR 5/15/94 05/15/94 4415 (H) READ THE SECOND TIME 05/15/94 4415 (H) STA HCS ADOPTED UNAN CONSENT 05/15/94 4415 (H) AMENDMENT NO 1 BY VEZEY 05/15/94 4415 (H) AMENDMENT NO 1 ADOPTED UNAN CONSENT 05/15/94 4416 (H) AMENDMENT NO 1-A BY VEZEY 05/15/94 4416 (H) AMENDMENT NO 1A ADOPTED UNAN CONSENT 05/15/94 4416 (H) AMENDMENT NO 2 BY B.DAVIS 05/15/94 4416 (H) AMENDMENT TO AMENDMENT NO 2 BY VEZEY 05/15/94 4417 (H) AM TO AM NO 2 ADOPTED UNAN CONSENT 05/15/94 4417 (H) AM NO 2 AS AMENDED ADOPTED Y24 N14 E2 05/15/94 4418 (H) AMENDMENT NOS 3-5 NOT OFFERED 05/15/94 4418 (H) ADVANCED TO THIRD READING UNAN CONSENT 05/15/94 4418 (H) READ THE 3RD TIME HCS CSSB 377(STA) AM H 05/15/94 4418 (H) FAILED PASSAGE Y15 N23 E2 05/15/94 4419 (H) ULMER NOTICE OF RECONSIDERATION 05/16/94 4437 (H) RECON TAKEN UP/IN THIRD READING 05/16/94 4438 (H) RECONSIDERATION FAILED Y18 N21 E1 05/16/94 4438 (H) MOTION TO RESCIND PREV ACTION IN FLNG TO 05/16/94 4438 (H) ...ADOPT HCS CSSB 377(STA) AM H(FLD H) 05/16/94 4439 (H) RESCIND PREVIOUS ACTION FLD Y15 N24 E1 05/19/94 (H) RETURNED TO SENATE 05/19/94 (S) PERMANENTLY FILED IN THE (S) ACTION NARRATIVE TAPE 94-64, SIDE A Number 000 SB 377 - STATE AGENCY FISCAL PROCEDURES CHAIRMAN VEZEY called the House State Affairs Committee to order at 9:00 a.m. on Saturday, May 14, 1994, convened jointly with the House Oil & Gas Committee and the House Judiciary Committee. Chairman Vezey said, "The subject before us is SB 377. I'd like to go back and clear up one thing on the record, I know that Attorney General, Bruce Botelho, is with us this morning and Mr. Botelho, you might could help us here - there is some confusion on the record as to the address of Mr. Spencer Hosie." ATTORNEY GENERAL, BRUCE BOTELHO: "He is the contract attorney from San Francisco. (Undiscernible) Alaska Bar formerly of Anchorage." CHAIRMAN VEZEY: "Do we have an address we can use for him?" MR. BOTELHO: "Mr. Chairman, I would expect that he would be here real shortly. In fact, he's walking in (indiscernible)." CHAIRMAN VEZEY: "Mr. Hosie, we're trying to clean up a little detail. Our transcribing secretary would like to have an address for you, if possible." MR. SPENCER HOSIE: "510 L Street, Anchorage, Alaska 99501." CHAIRMAN VEZEY: "Thank you, very much. Next on our witness list I'd like to call Mr. Paul Wessells with BP. Mr. Wessells, do you have a statement you'd like to give us or you just want to take questions, or.." PAUL WESSELLS: "If I might, I have a statement." CHAIRMAN VEZEY: "Please. If you would state your name, and I have your address on the witness sign-in sheet, so." Number 037 MR. WESSELLS: "Good morning, Chairman Vezey, Chairman Porter, Chairman Green and members of the committee. My name is Paul Wessells and I am Director of Tax, BP Exploration, Alaska. I'm hear today to testify on behalf of BP against the proposed retroactive changes in the statutes of limitation on assessment and collections, as set forth in Sections 1 and 2 of Senate Bill 377. Although, oil and gas taxes may seem like an obscure subject to most people, the tax administration system in Alaska, at least on paper, is not a great deal different from others, including the federal income tax system. When it's time to do your taxes, you read the instruction booklet, you fill out a return, calculate the tax you owe and then write a check. As I'm sure some of you are painfully aware from personal experience with the IRS, that's usually not the end of the matter. It's no different for oil and gas producers here in Alaska. The auditors in the Department of Revenue examine the returns we file, ask for explanations of items in these returns, and then decide whether the correct amount of tax has been paid. If the auditors believe we should have paid more, they give us a bill for the extra tax and some sort of explanation of how they calculated the bill. This bill for additional tax is called an assessment and demand for payment. The IRS uses a different name for the bill they give you when they finish an audit, but the process leading up to that bill is essentially the same. Now just because you get this bill from the IRS or the Department of Revenue doesn't mean you owe it. The auditor might have made a mistake, either in calculating the bill or interpreting the rules contained in the tax statutes and regulations. Whatever the nature of the mistake in an assessment, taxpayers have the right to ask the state and the IRS to correct the error. The way a taxpayer asks a correction is by filing an appeal. In Alaska, taxpayers usually start the error correction process by asking for an informal conference with a Department of Revenue employee. If all the errors are not corrected, the taxpayer can request a formal hearing, presided over by a hearing officer, who is also a Department of Revenue employee. After the formal hearing, the department's hearing officer writes a decision. The Commissioner of Revenue then reviews that decision. If the commissioner approves the decision, it is formally issued and becomes the official position of the department on the matter. At that stage, the taxpayer has 30 days to appeal that decision to court. In a nutshell, that's how the tax audit and appeal system or process works within the Department of Revenue in Alaska. "So how do the statute of limitations fit into this? Well, their rules are there to regulate the audit and appeal process. Simply put, they give the department three years from the filing of a tax return to audit it and send the taxpayer the bill for additional tax that the auditor thinks should have been paid, and then an additional six years to get the claim into court for collection. If the department doesn't send the bill within the three year period, it can never claim and collect any additional tax from the taxpayer. We're talking about additional tax here. The same rule applies to your federal taxes. If you haven't heard from the IRS within three years after April 15, you can throw your records away. You won't be needing them, because they won't ever be able to send you a bill for an extra tax for that year. Here in Alaska, the six-year statute is satisfied if within the six years the department considers and decides a tax appeal and the appeal gets into court. In other words, when the appeal gets to court, it becomes a judicial proceeding of the type that the six-year statute talks about. What this means is that if the Commissioner of Revenue does not make a final administrative determination of a taxpayer's appeal before the six year period runs out, the state can't collect the bill. So it's three years to audit and six years to collect. Nine years altogether. "Now I'd like to talk about how Senate Bill 377 would change these rules. The amendment contained in Section 1 would change the three-year audit statute so that even after the three years are up, the auditors can raise new and unrelated issues and increase their claims without limit for more tax at any time, so long as the department has not finished its consideration of the appeal and issued its formal hearing decision. Section 2 of Senate Bill 377 would change the six-year statute so that the clock for the six years isn't running while the tax assessment is being appealed within the Department of Revenue or in court. This doesn't sound like a big deal, until you stop and think about what it really means. The six-year statute currently sets a time limit on how slowly the department can consider and decide a tax appeal. It has to get its work done on the appeal in six years. But under the administration's proposal, the six year clock won't be running while the department considers the appeal. So the department will, under this legislation, be free to take as many years as it wants to, to make a final decision. And under the change proposed to the three- year statute, at any point during all that time while the department has the appeal, it can change its mind about what the tax laws meant years earlier when the taxpayer originally filed its return. Can you imagine what you would think if after an IRS audit, you got a bill for an additional $1,000. You filed an appeal explaining why you didn't think you owed it, and then heard nothing from the IRS about the disposition of your appeal until nine years later, at which time you get a bill for an additional $2,000 with an explanation that the IRS has come up with a new interpretation of the same rules. And, of course, the $3,000 has 12 years of interest added to it. Well after you managed to calm down, if that were possible, you'd probably think that something was terribly wrong with the U.S. tax system. Now you probably think I have a pretty vivid imagination to come up with a story like that. Let me assure you, that except for the amount of tax, this story is true and it happened to BP, right here in Alaska. This changing of the department's mind during the course of an extended tax appeal is one of the most troubling problems Alaska has with its present tax system. And because of tax confidentiality, it is one of the most difficult to explain to the public with real life examples. In effect, this institutionalized revision makes it impossible for a taxpayer to know what the correct amount of tax is when it files its return and its time to pay. It's absolutely impossible. "The proposed amendments to the statutes of limitation that you are being asked to enact in this special session would ratify this course of conduct. Even if this is legal, and we don't think it is, is it a sensible tax policy? Apparently the administration does not think so, that's why their proposal for the future is a rule that gives the department five years to audit and make its claim for more tax, and after that tax claim, that claim cannot be increased after the five years. Well then I must ask you, if the amendment to the three-year statute that is being proposed to deal with years before 94 is not good policy for the future, why is it fit for the past? "Now I'd like to say a few words about our efforts; that is BP's efforts, in recent weeks to find a compromise on this legislation. We've had a number of discussions with the attorney general, in an effort to find the middle ground. As you know from the letter you received from our President, John Morgan, we offered not to claim the six-year collection statute as a defense in consideration for the administration dropping its insistence on retroactivity. We also supported legislation that would adopt royalty settlement values as a basis for tax valuation. The administration rejected these overtures. During our several discussions with them, it has become very clear to us that withdrawing support retroactivity, especially with regard to the three year limit on assessments, is an idea that they will not accept. As you all know from Mr. Sullivan's testimony yesterday, the Supreme Court is scheduled to hear a case next week that will determine the proper interpretation of the three year limit on assessments. We had hoped that the administration would conclude that our offer not to claim the six-year statute would avoid the prospect of amounts being quote `taken off the table' closed quote, in negotiations and that a proper judicial determination of the meaning of the three- year statute would be satisfactory. BP is prepared to live by whatever the court decides. Why isn't the administration? Is it concerned that the state might not prevail? That is the problem, the message for business in Alaska is pretty ominous and that is; if the state wants your money bad enough it will do anything, even change its laws retroactively in order to get it. In addition to being bad policy for the state by sending a very clear stay away message to investors, SB 377 won't even deliver as advertised; that is, as a catalyst to settlement of these old tax claims. It only adds another procedural twist that both sides' litigation teams will spar over. And it won't save the alleged $3 billion of back taxes from falling off the table. Either it is already fallen, or the present law keeps it from falling off the table. Thanks for this opportunity to testify. I'd be happy to answer any questions you might have." Number 260 CHAIRMAN VEZEY: "Thank you, Mr. Wessells. Is it, from your testimony, that your opinion that either the purpose, objective or effect of this legislation is to influence the court decision." MR. WESSELLS: "Mr. Chairman, I listened to the testimony yesterday and there was a lot about the court decision and how this legislation might interact with it or how it might be effected, or might affect the decision, I can't really answer the question of what the motivation is here. But you know, it seems very odd to me that we're here and we spent all this time talking about this legislation when, indeed, that is the issue before the court. At least, on the three- year statute. There's been quite a lot of testimony on both sides about whether this interpretation of the three-year statute that is going to be before the court, has been, or the position that is being taken in this legislation, is longstanding policy in the Department of Revenue. There's been quite a lot of testimony on that and based on what I've heard, it sounds to me like longstanding can only mean from 1989 forward and I think, that as far as this process that we're going through in trying to determine, you're trying to determine, whether this legislation makes any sense, you're really being asked to make a finding of whether this policy was legitimate. That's really the issue that is before the court. When they find it, if they're allowed to, then it will be the law of the state and no one will question it, including us. If you do so, it'll still be an open question." CHAIRMAN VEZEY: "Thank you. Are there questions? Representative Sitton." Number 293 REPRESENTATIVE JOE SITTON: "Mr. Chairman, if Mr. Wessells' has it, I'd appreciate a copy of his remarks. Do you have a printed copy?" MR. WESSELLS: "I do not have it with me, but I will have one made and get it to you very soon." CHAIRMAN VEZEY: "If you could transmit a copy to the committee aide, why we can ...." MR. WESSELLS: "I'd be happy to." CHAIRMAN VEZEY: "Yes, Representative Bunde." Number 298 REPRESENTATIVE CON BUNDE: "Thank you, Mr. Chairman. Could I infer from your remarks that it's an open question that if we don't allow the courts to settle it now, it will be back in court again?" MR. WESSELLS: "Well, I think there's a serious question about the constitutionality or would be a serious question about the constitutionality of a law of this sort that reaches back 18 years and substantially affects the expectations and rights of people that have been developed or held over that period of time. I suspect some taxpayer is going to challenge that." CHAIRMAN VEZEY: "Representative Porter." REPRESENTATIVE BRIAN PORTER: "Thank you. Mr. Wessells, I understand your position on if Section 1 were in place, that the affect of that would make Section 2 a forever situation. But if Section 1 were not in place, would it be your impression that Section 2, basically represents the state of the case law now?" MR. WESSELLS: "Well, there is a decision in Superior Court, the Tesoro case, bearing on Section 2. That is a decision of the Superior Court. There has not been a decision in the Supreme Court, so I think that's still an open question." REPRESENTATIVE PORTER: "One more, if I may, Mr. Chairman. You mentioned early on in your testimony something that I quite frankly haven't gotten absolutely clear in my mind. Without any proprietary information, is it your impression that generally, all of these claims are claims that the problem with them or the case in court, for example, represents a desire not to accept assessments that were made after the three year period, but that claims have been made on all oil produced, it's just the increased additional claims on the same oil that is in dispute." MR. WESSELLS: "I'm not aware of any, I can tell you that we have, there are no taxable years that are in question for BP here, in which there would be no liability for additional claims because of the three-year statute of limitations. It is - the issues that we have are with respect to additional assessments that have been made after that period of time." REPRESENTATIVE PORTER: "Thank you." CHAIRMAN VEZEY: "Further questions? Representative Davidson." REPRESENTATIVE CLIFF DAVIDSON: "Thank you, Chairman Vezey. I'm sorry, sir, I did not get your name." MR. WESSELLS: "Wessells." REPRESENTATIVE DAVIDSON: "Mr. Wessells, good English name, huh?" MR. WESSELLS: "Dutch, actually." REPRESENTATIVE DAVIDSON: "I'm sorry. Mr. Wessells, the negotiations about which you spoke, who were all the parties involved in those negotiations?" MR. WESSELLS: "The negotiations, you mean the conferences that we've had with the administration concerning this legislation?" REPRESENTATIVE DAVIDSON: "The ones that you mention in your discussion there. In your written statement, you talked about negotiations. Who were all the parties represented in that." MR. WESSELLS: "I don't recall, Mr. Chairman, mentioning any negotiations. I did mention, though, that we did have conferences with members of the administration concerning attempts to reach a middle ground on this legislation and the discussion that I had, and the president of the company had, was with the attorney general." REPRESENTATIVE DAVIDSON: "Were there, was there legislative involvement in those negotiations?" CHAIRMAN VEZEY: "Representative Davidson, for clarity, I think we're all aware that there have been negotiations going on between the administration and the taxpayers." REPRESENTATIVE DAVIDSON: "Are you attempting to...." CHAIRMAN VEZEY: "Representative Davidson." REPRESENTATIVE DAVIDSON: "...what's in the record, Mr. Chairman?" CHAIRMAN VEZEY: "Representative Davidson, you're out of order. Representative Davidson, we are aware that negotiations are going on. Those negotiations are privileged information regarding litigation. It would not be appropriate to try to interject the content of those negotiations into this meeting." REPRESENTATIVE DAVIDSON: "All I'm trying to establish, Mr. Chairman, is the fact that apparently there was legislative involvement in those negotiations. The content is of no consequence, to me, in making the point for the record." CHAIRMAN VEZEY: "I think you're going too far, Representative Davidson. You're out of order. You may ask if they're in negotiations, that's as far as you can go." REPRESENTATIVE DAVIDSON: "Are there negotiations with legislative parties?" Number 373 MR. WESSELLS: "Mr. Chairman, I'm not sure I understand the question in terms of what negotiations we're referring to here. I've said we did have discussions concerning the proposed legislation, not only with members of the legislature, but also with the attorney general." CHAIRMAN VEZEY: "Representative Davidson will have to clarify his questions because negotiation is a broad term." REPRESENTATIVE DAVIDSON: "Well, Mr. Chairman, I don't want to go against your ruling, so what I'll do is move onto my second question, if I may." CHAIRMAN VEZEY: "Please." REPRESENTATIVE DAVIDSON: "You raised the specter of constitutional issues. What are those constitutional issues?" MR. WESSELLS: "The issue in this case would be if this legislation were passed, whether a bill or a law retroactively affecting rights of taxpayers for a period of 18 years would be constitutional." REPRESENTATIVE DAVIDSON: "So does that involve the right of due process, is that what you're talking about?" MR. WESSELLS: "That would be one issue, I would suppose, yes." REPRESENTATIVE DAVIDSON: "On that supposition, Mr. Wessells, it is my understanding and it's footnote 3 on page 8 of the court opinion, the Superior Court judge indicates that the court finds no merit in these constitutional arguments, so how do you respond to that?" MR. WESSELLS: "Well, I would say that we're only speculating about a case in the future that might occur. That would only occur if this legislation were passed, and there hasn't been any ruling in the state of Alaska, that I'm aware of, of this sort on legislation of this sort." REPRESENTATIVE DAVIDSON: "I have another line of questioning, Mr. Chairman. Thank you. You've talked - you gave the fantastic story about the IRS, it was a good one. Let me ask, if in fact what would be the position of your company if, at the end of those nine years, there was new information or new discoveries made that resulted in say, tens of millions of dollars or maybe even hundreds of millions of dollars going back to your company, would you then think that it was a travesty or would your company take that money?" MR. WESSELLS: "Mr. Chairman, I think the question is whether, if the Department of Revenue during the course of an audit or appeals process disclosed a new position or had a new interpretation of the law, or indeed, new facts came to light, which I think was the point, whether in a circumstance where the statute of limitations on assessments had actually run out, whether I would think that that was a travesty. Well, it's a value judgment on whether it's a travesty or not, is one matter. What the law is, is what really counts. And if the law says that those claims could not be made, then we have to comply with the law." REPRESENTATIVE DAVIDSON: "What is your company's, Mr. Wessells, what is your company's understanding of, when the SOL clock starts regards new information that is discovered in the course of the appeals process, initiated by yourselves?" MR. WESSELLS: "The only information that would, I think the only information that came - that would come to light or might come to light in the course of the appeals process that would allow the statute of limitations to continue to be opened would be some finding or evidence of fraud." REPRESENTATIVE DAVIDSON: "Well, I understand there's two other things, but you didn't get to my question in the way that I thought you would. Does this mean then, that when, you call it new interpretation, I would say it also involves a new understanding of the materials that you have presented in your tax return. Are you saying that a new understanding which results in the amount that goes back and forth between the parties goes either way, that there should not be a new billing offered?" MR. WESSELLS: "Mr. Chairman, I think that the best way I can answer that is that to try to respond to what I think is the policy in the statute of limitations. And it is to seek closure in the debate over a tax liability. Certainly new understandings of the existing facts could occur 20 years after the fact - at any time, after the return is filed. I think that there is a policy though in this statute of limitations that says at some point, the parties have to cut to the chase, decide what the bill is, and argue that out. And that's the end of the matter. That's the way I feel about it and I think that was the intention in the statute and the policy behind it." Number 451 REPRESENTATIVE DAVIDSON: "So, then if I understand you correctly, it is your position that the appeals process does not suspend the statute of limitations clock." MR. WESSELLS: "That's correct. The three-year statute of limitations, that is correct. The only thing that suspends it is a finding of fraud or an agreement." REPRESENTATIVE DAVIDSON: "Well, Mr. Chairman, I have additional questions that regards the negotiations, but I'm sure that you wouldn't permit them, so I'll close at that." CHAIRMAN VEZEY: "Representative Davidson, you're not clear on which negotiation you're referring to. If you're referring to settlement negotiations, those are a matter of attorney-client privilege and not a proper subject for this hearing. If there's some other negotiation you're referring to, please be specific." REPRESENTATIVE DAVIDSON: "Ah, I am referring to negotiations that should, in view, I think, of the overwhelming amount of the public sentiment, be at least, discussed in a public forum." CHAIRMAN VEZEY: "I'm sorry, that's not our privilege. We can't make that determination here." REPRESENTATIVE DAVIDSON: "All I was trying to do is to, at least for purposes of establishing on the record, that who is it that should be involved in these negotiations. It seems that we've got some confusion as to who's negotiating what for whom and I'm trying to understand, Mr. Chairman, are there legal breaches, are there things that we should be examining as public servants, serving the public interest, that we can't get to because of attorney-client privilege and thereby exclude some kind of legislative closure to those negotiations. I understand it's a very difficult thing, and I appreciate your generous offer to give me latitude." CHAIRMAN VEZEY: "Representative Davidson, as legislators we need to, more than most people, respect the issue of separation of powers and it is not our place to interject ourselves into the court system and their process." REPRESENTATIVE DAVIDSON: "Well stated." CHAIRMAN VEZEY: "Further questions of Mr. Wessells before we start going through the bill section by section?" REPRESENTATIVE DAVIS: "Mr. Chairman." CHAIRMAN VEZEY: "Representative Davis." Number 482 REPRESENTATIVE GARY DAVIS: "Thank you. Mr. Wessells, in practical terms, due to the complexities of the audits of this, you indicated that, you know, the policy should be to reach closure. Should that not be there, because of the complexities, you could probably go on forever changing numbers and looking at codes, and looking at issues, and chasing down a barrel of oil, or, isn't that true, if there isn't a policy of some closure, a statute of limitations number that should probably come up as - could be almost anywhere." MR. WESSELLS: "I would agree with that. I think that is why I emphasized earlier, I think that, different jurisdictions, different states, will have different means of effecting that, either in the policies or the laws affecting what their departments of revenue do during the course of hearing a taxpayer's appeal. It happens that in Alaska, there is an awful lot of latitude that the department has, and the commissioner has, in reaching a final determination in the scheduling of that - has a lot of authority in terms of setting the schedule - how long it takes and so forth. And the statute here in this case kind of sets an outer limit to that. It's a statute that can be extended, by the way, of course by mutual consent, so it's not draconian in the sense that it forces the administration or, excuse me, the commissioner to not have enough (indiscernible). And, of course, the commissioner always has the ability to levy a jeopardy assessment, if time is running short and the taxpayer is not cooperative in terms of giving time. So, I would agree that some sort of limit on the process is necessary, not only for the taxpayers; it is necessary for the state, as well. You have a situation where you get to open tax years that stretch for over 15 years, you as the people that figure out how to run this state, are not sure at all, because of, as you well know, what amount of tax is actually going to be collected. And it affects the planning, I'm sure it does - it must. So I think it's in everybody's interest to have a closure on these matters." REPRESENTATIVE G. DAVIS: "Mr. Chairman, if I might." CHAIRMAN VEZEY: "Please, Mr. Davis, Representative Davis." REPRESENTATIVE DAVIS: "Mr. Wessells, has it been BP's policy to agree to extend the three years?" MR. WESSELLS: "Yes. I have not been in Alaska for this whole period of time and I've not been engaged in these matters before - directly before 1992, but we did a rough reconnaissance and found that we had - we knew of 34 times, at least, that we had extended this three-year statute of limitations, and we didn't get through all the files. So, that is why in John Morgan's letter to the legislature, he mentioned (indiscernible due to background noise on the tape). I'm not aware of a time, any time, that we've been requested to extend the three-year statute of limitation, that we denied that request." CHAIRMAN VEZEY: "Representative Sitton." REPRESENTATIVE SITTON: "Mr. Chairman. And why would you do that, Mr. Wessells? Why are you agreeable to all these extensions all the time?" MR. WESSELLS: "Well, because we're trying to work with the Department of Revenue to resolve these issues in a business- like way. And we recognize that it does take time to deal with these very complicated matters. So, it is in the interest of both parties, to try to settle these issues in a sort (indiscernible) way, rather than to have a face-off in a litigation over every single item that might arise as an issue in a tax return." CHAIRMAN VEZEY: "Representative John Davies." Number 537 REPRESENTATIVE DAVIES: "Thank you. Mr. Chair, I apologize for being late this morning and if this question has been asked, I beg the indulgence of the members here, but one of the issues that you've raised here is the one of closure, you know and some sort of end to the process, and I just wonder if you would comment on the route that's available to you through the formal hearing process and being able to close off the process that way. You know, assuming that - I guess I'm a little confused too, maybe you could preface that with an answer to another related question which is, if, as is the case, and I've no doubt to believe that's it's true, that every time the state is asking for an extension, you have, and we had substantially similar testimony from Exxon - the representative from Exxon yesterday, why are we arguing about the statute then, if every single time the state asks you for an extension, you extend it, then what are we doing here?" MR. WESSELLS: "Two questions. I'll answer them in order. As far as the choice of formal hearing or formal conference as a methodology for drawing closure, first of all let me say that's it not clear in every instance that that will indeed draw closure to the administrative process. We heard Mr. Sullivan of Exxon yesterday related to us a story about a formal conference decision that was, at least initially, approved by the commissioner that was remanded to the division - the audit division - for computations and findings, that is still open as far as I know, so it - or at least I was left with that impression. So, because you choose that route, doesn't necessary mean that, at least in that instance, that you get a final determination. But on a more, a less legalistic and on a more practical level, BP is not a very litigious company and our experience in dealing with, it's not something we prefer to do, it's quite expensive - these formal hearings, as we are learning presently, because we have elected to go through the formal hearing process, is quite involved in terms of the time it takes and the cost that's associated with it. Our experience has been with other tax jurisdictions, that we've managed to work out reasonable agreements about tax liability in a reasonable amount of time. This is true, both with the federal tax authorities and with other states. So, it is not something that 10 years ago we would have thought was the normal course of events to choose. Indeed, I must tell you, that during the last several years of trying to resolve our tax liabilities with the state of Alaska, on occasion, we have had at least one employee in the Department of Revenue - one official - implore us not to take that route, to continue to discuss these matters on an informal basis, because it seemed like we were making some sort of progress toward resolution. So, I think that the notion that taxpayers can always draw things to a close and it's desirable to do so, by electing the formal route is a notion that is not necessarily in the best interest of both parties (indiscernible)." REPRESENTATIVE DAVIES: "Mr. Chairman, may I follow up with one more." CHAIRMAN VEZEY: "Please." REPRESENTATIVE DAVIES: "One other potential way to close it off would be to pay the tax that was claimed that was owed and then to follow up with a refund. And it's my understanding, that that does really foreclose the possibility of the state making further increases, which seems to be one of the...." MR. WESSELLS: "Well, I would have thought it would, be under this, as I read Senate Bill 377, that wouldn't work either because the statute of limitations on assessments would be open even during the course of a claim for refund. So that if you - the only way to really gain closure, if this were the law, would be to pay the assessment and go mum." REPRESENTATIVE DAVIES: "So you read this to say that if the issue was reopened by filing for the refund, that then the state could continue to up the assessments even during that process?" MR. WESSELLS: "If we look at Section 1 (a) (1), the added language, however, any time during the administrative consideration of a taxpayer grievance, or of a claim for refund, or a claim for credit or refund, what that says to mean is that I could choose the route that you just described, pay the assessment, claim it as a refund, and then get another assessment, because I've reopened the process by making a claim for refund. At least that's what it seems to say to me." REPRESENTATIVE DAVIES: "Thank you." MR. WESSELLS: "You had another question though, I don't think I answered." REPRESENTATIVE DAVIES: "No, I think you answered them, thank you." CHAIRMAN VEZEY: "Representative Davidson." Number 607 REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. Mr. Wessells, you talked about 34 extensions - I don't know how you broke that down, or if you did. How many of those were requested by the state and how many were requested by your company, do you know?" MR. WESSELLS: "They were all requested by the state." REPRESENTATIVE DAVIDSON: "Have you requested any extensions on appeal?" MR. WESSELLS: "No, not that I'm aware of." REPRESENTATIVE DAVIDSON: "Not that you're aware of. What kind of information or events have typically resulted in different assessments for your company?" MR. WESSELLS: "The ones that come to mind immediately, are ones where the Department of Revenue has either changed its view of an interpretation of the law or regulation, or has - actually, the ones that I can recall, that I can think of, are ones where the department has taken a different position from one that had been taken before on the meaning of a statute or a regulation." REPRESENTATIVE DAVIDSON: "Primarily then, differing opinions in regards to interpretation." MR. WESSELLS: "That's right." REPRESENTATIVE DAVIDSON: "So, that brings me to this question of what kinds of information may the state have access to, once the appeals process kicks in, that before that, they did not have available to them?" MR. WESSELLS: "If my understanding of the law is correct, the department can gain access to any information through the subpoena process. And I don't think that that changes at all during the course of an appeal, an administrative appeal. The rules that are agreed to or ordered by a hearing officer in a formal hearing context may be more specific or a little different, but in terms of the ability to access information, there is not a difference." REPRESENTATIVE DAVIDSON: "Would it be fair to say though, that information available in the appeals process might very well, legitimate result in a different assessment, up or down?" MR. WESSELLS: "Well, I suppose that it's possible, but it's still the same information that would have been available during an audit process." REPRESENTATIVE DAVIDSON: "If you had enough information or understanding, right?" MR. WESSELLS: "Right." REPRESENTATIVE DAVIDSON: "Mr. Chairman, I have just one other question, if I may." CHAIRMAN VEZEY: "Please." Number 639 REPRESENTATIVE DAVIDSON: "Thank you. I asked this question yesterday of another company and the question is, what pushes the pace of your company's response to the appeals process or court proceedings?" MR. WESSELLS: "Well, when we receive an assessment, we have 60 days from the date of the receipt of the assessment, to either pay it or to file an appeal. When we file an appeal, we file what is called a protest, which sets out, at length, the reasons why we think the assessment is incorrect, is in error. Once that is filed, at the time it is filed, there is a presumption in the procedures that one will have an informal conference, unless it is waived when you file that appeal. On only one occasion, have we waived that right to an informal conference. So then, our experience is primarily with filing the protest and setting up or seeking the informal conference resolution process. From that point on, taxpayers, at least BP in its experience, have no control over the timing issues. It's in the hands of the Department of Revenue, at that stage. The only thing that we could do to control the situation from that point on, is actually to pay the assessment." REPRESENTATIVE DAVIDSON: "So, if the chronological goal line is three years, your company would never delay to reach that goal line, is that a fair statement, then?" MR. WESSELLS: "Well, the three years as I described the process earlier, three years is, I think, there in order that an audit can be done and that an initial assessment can be made. And as I said earlier, the extensions that we have given, have been in the context of allowing those audits to be completed. After the audits are completed, indeed they may take more than three years, because, and that's what the extensions are about, and we've done what we can in terms of trying to get the work done." REPRESENTATIVE DAVIDSON: "So, when that chronological goal line has been reached, does that mean there's a different kind of approach or attitude that your company takes toward the appeals process?" MR. WESSELLS: "No, as I said earlier, that we have, we try to, as we do with other taxing jurisdictions, we try to operate as best we can, or most often on as informal of basis as we can, in order to try to resolve issues. And, so as far as we're concerned, the process itself, is not changed all that much. The thing that is different, is from that point in time when the audit process closes, we know exactly what the claims of the state are regarding our tax liability, and we know what the discussion is about, and don't expect to have new claims or new positions develop during that appeals process." REPRESENTATIVE DAVIDSON: "Not even if the relation back doctrine falls into place or relates to the issue?" MR. WESSELLS: "Sorry, Mr. Chairman, I'm not sure I understand the relevance of the relation back doctrine to this appeals process that we're discussing." CHAIRMAN VEZEY: "I'm not positive that I do either. Could you elaborate, Representative Davidson." REPRESENTATIVE DAVIDSON: "Well, it's my understanding from what I learned yesterday, and it's pretty interesting to be learning law by doing it, I guess, but that in the process of appeal, if something new is learned that it relates back to what the original figures were and that because of that new information and that relationship of that new information to what the tax was issued back there, that it is legal and right for the sovereign power to, I guess, as I learned yesterday, in any civil matter, the new information can force a new situation. Maybe I should leave it at that, because I'm certainly not legally trained, but I'm getting more respect for those in that profession all the time. Thanks." MR. WESSELLS: "Well, I think, that if the question, relating back to yesterday's testimony, is whether the Superior Court's decision in the Exxon case, is one that our company thinks is correct, and that is that the three-year statute of limitations says what it means and that is, that after the three years there's not an ability to issue a new assessment, then I would say `yes' our company agrees with that interpretation." REPRESENTATIVE DAVIDSON: "So you've agreed with the Superior Court's decision regarding that aspect of the case, but when that same court says that these constitutional issues that due process... TAPE 94-64, SIDE B Number 000 REPRESENTATIVE DAVIDSON, CONTINUED: "...in fact would you continue appeal, if in fact, you disagreed with the lower court's decision regarding the constitutional issues. Do you understand my question, Mr. Chairman?" Number 010 CHAIRMAN VEZEY: "I'm not thoroughly understanding it, but I'm beginning to get your drift. I'm having a little difficulty separating the issue of three years-statute of limitations on filing an assessment and the issue of bringing new facts into an appeal case. I'm not sure where you're drawing the line and I believe the testimony we have received, no one has disputed the fact that during the course of an appeal, new facts can be brought in. There is dispute over the authority of the state to increase the assessment during that process. But I'm not quite sure where you're coming from." Number 020 REPRESENTATIVE DAVIDSON: "Well, I guess what I'm not quite sure is about where you understand that, I mean, it seems to me in this bill, we have a definitive five year cap on everything. It seems to me that what that Section 2, I believe, does is it throws out the doctrine of relation back. And what I don't understand is what your position is regarding well, if in fact, we have new, and remember, we're talking about a period of time when we had a huge case of separate accounting go to court, we're talking about a tax return that was filed in June of 79, right in the middle of when separate accounting was in effect, and then went to court. The state won that case and found that they could do separate accounting, but we chickened out and changed the law, what I don't understand about your position, Mr. Chairman, is do you think that, even after three years and new information is brought to light, because of new understanding of what something meant or how it relates to the bottom line, how much taxes are paid, the state does not have the right to collect that? Because often times the appeals process is started by the taxpayer himself." CHAIRMAN VEZEY: "It's not my position that we're discussing, Representative Davidson. I was trying to relate to you what I had heard in testimony to help you phrase your question." REPRESENTATIVE DAVIDSON: "I appreciate that, Mr. Chairman." CHAIRMAN VEZEY: "And we do, I think, tend to jump around a little bit and mix apples and oranges some. The.." UNIDENTIFIED SPEAKER: "It is a fruit basket, I promise." CHAIRMAN VEZEY: "I don't think that the testimony is not disputed that new facts can be brought up during the case of an appeal. But I believe it's been Mr. Wessells' testimony that they do not believe the state has a right after three years to file an assessment, nor does, I believe I interpreted his testimony to mean that after three years, they do not have a right to increase an assessment. Maybe I'm wrong on interpreting his testimony, but that's what I think I've heard." REPRESENTATIVE DAVIDSON: "To have the right to decrease that assessment." CHAIRMAN VEZEY: "Yes. That would be my understanding of the testimony. And, Mr. Wessells can elaborate on that if that clarifies the question." MR. WESSELLS: "I would agree. Yes, that's right." REPRESENTATIVE DAVIDSON: "I guess it puts the public interest at a disadvantage, from my perspective." CHAIRMAN VEZEY: "Well, as a committee, we can debate this at a later time, but if we would confine our questions, at this time, to the written (indiscernible)." REPRESENTATIVE DAVIDSON: "Sure." CHAIRMAN VEZEY: "Representative John Davies." Number 099 REPRESENTATIVE DAVIES: "Thank you, Mr. Chair. Mr. Wessell, I'm sorry, I did lead you astray a little bit, with a follow up question and we didn't get to one of the questions that I did ask, you were right. And that question was, following on your testimony that, I take it, that essentially all the time that the state asks for an extension, that you have granted that to complete the assessment process." MR. WESSELLS: "To my knowledge, yes, that's correct." REPRESENTATIVE DAVIES: "And so my question was just simply, if that's true, then why are we debating this? I mean, why are we here, what's the problem then?" MR. WESSELLS: "Because, I think the reason is, because the state or the Department of Revenue, has not asked for extensions of the statute during the course of the appeal. I'm not aware of a single time, and I must qualify this, because I'm not aware in my own experience or I have been told my anyone else in our company, that there has ever been such a request." REPRESENTATIVE FRAN ULMER: "Mr. Chairman." CHAIRMAN VEZEY: "Representative Ulmer." REPRESENTATIVE ULMER: "That's a very interesting point that I guess we ought to think a little bit about - you have not objected to extensions before the appeal was filed, but.." MR. WESSELLS: "Whenever we've been asked. Excuse me..." REPRESENTATIVE ULMER: "Whenever you've been asked, but you weren't asked during the appeal, and so you're taking the position that because of that, because the appeal was filed and because you weren't asked for an extension, that those claims are lost to the state. And, that's a very different way of looking at this issue, because if the position of the industry was that you were objecting to the retroactive change because you wanted some finality, you didn't mind not having the finality before the appeal was filed - you granted the extensions, but once the appeal was filed, you changed your position and decided that you didn't, at that point, feel as though additional time was in the industry's best interest. I guess, I don't know..." Number 146 MR. WESSELLS: "That's, Mr. Chairman, that is really, that's not correct." REPRESENTATIVE ULMER: "Okay, let's talk about it." MR. WESSELLS: "As I said earlier, we grant and continue to grant extensions so that the audit process can be completed. That is what the extension is for. The statute of limitations is there to draw closure on the claims that the state can make for additional tax, which is what the audit process is designed to accomplish. In terms of how we approach the appeals process, in the same way the state approaches it, or at least we thought it did, was that the issues of liability are then defined in terms of - and we had been given a bill based on those claims, and we proceed to try to get that bill corrected through the appeals process. At that stage, in our view, and in my view, the fact-finding has been completed and the issues (indiscernible), and we know what we're talking about and that's how we proceed to try to resolve those issues. We have given, in every instance that I'm aware of, extensions in order that the audit process for defining those issues can be thorough and complete. Once that process is closed through the receipt of an assessment, then we either pay it - which I might add, we've done on some occasions - or we actually file the protest and commence the appeal process." REPRESENTATIVE ULMER: "Mr. Chairman, I guess I'm just saying that the commencement of the appeal process - seems to me it would be unfair to use that to bar the previous claims. Because neither party can necessarily control how long the appeals process takes." MR. WESSELLS: "Well, first of all, it would not bar that process, if the process commenced within the three year period, which it can do, or during an extension of that three year period. Because under the statute, then the statute of limitations for assessment would still be open." REPRESENTATIVE ULMER: "But isn't that what happened? I mean, you did grant the extensions, I thought you said you granted all the extensions until the appeal process began and then you are just contesting the fact that the state didn't ask for, and you did not grant any extensions after the appeal process began." MR. WESSELLS: "Well, we were never... No. I can't tell you the timing on each case, but it is possible in some of these instances that the three-year statute on assessments was still open when the appeals process commenced, because it had, in our case, it would have been extended for some period of time and perhaps we received the assessment before that period concluded. So there was technically, and actually legally, there would have been an opportunity to issue a new assessment in a situation like that." REPRESENTATIVE ULMER: "Well, I think it is an important point and maybe I'm headed down a path that others aren't interested in, so I won't ask any more questions about it, but I would like some additional information from whomever in the room that has some about this question of whether the objection to the length of time that we're talking about is only because the state did not ask for and you did not give an extension after the appeals began; as opposed to simply objecting - the arguments that I've been hearing have been pretty much, we object to the lack of timeliness because of freshness, staleness, difficulty of maintaining records, et cetera. But yet, I hear you saying you didn't object to any of those extensions until the appeal process began. And just using the fact that the state didn't ask for an extension after the appeal process should not somehow close the door on those claims, just doesn't seem fair to me." Number 232 MR. WESSELLS: "Mr. Chairman, in order that the record reflect the intent of my statement, or that my answer to your question, there has been no objection during the course of an appeals process to any view on the statute of limitations taken by the Department of Revenue, because, indeed, there was never any question that arose during that period of time. I mean if a statute of limitations extension is requested, then we have the choice of either granting the extension or consenting to the extension mutually during any period, as long as the statute has not terminated as of that time (indiscernible). Well, if the question is never raised, there's not a possibility of an objection. So we are not objecting to anything." CHAIRMAN VEZEY: "Representative Phillips, did you have a question? Representative Hudson." REPRESENTATIVE BILL HUDSON: "Thank you, Mr. Chairman. Mr. Wessells, just trying to understand better the practice of granting extensions, were the extensions, for the most past, limited by agreement to the scope; that is, I'm trying to figure out if, when extensions were granted beyond the three year period, if they may have at certain times, increased the assessment; that is, the state's value of assessments that might have been agreed upon by the company and paid by the company. I'm trying to decide just what affect the increases beyond the three year period of time - the mutually agreed upon openings or increases - were they limited by scope and do you recall if there has ever been a case when they were granted that they also increased the assessment? The state's assessment." MR. WESSELLS: "Well, I'm not aware of any that have been limited as to scope. Really, the ones that I know about, that I've seen, or even executed myself, have been for the specific tax. They have to be specific to the tax in the year they address. But in terms of limiting them to any specific issues, I'm not aware of that happening for our company." REPRESENTATIVE HUDSON: "Thank you. May I have another question, please, Mr. Chairman. Just so that I can clearly understand it, yesterday, I asked of Mr. Sullivan whether or not claims prior to the three year, up to the three year, and during those periods of agreed upon extensions remained alive - the impression that I've gotten, at any rate from the Department of Law, is that at risk is if you don't complete this within three years or if we don't pass this bill, that everything back, is dead. And, I think, yesterday we heard, and I'm sure that I misinterpreted that, so I just want to try to understand it, is it your understanding that all of the claims that the state has, up to the three year periods of time and during those agreed upon extensions, remain alive -is it just the period beyond that time where there is no agreed upon extensions that is at risk or potential at risk?" MR. WESSELLS: "I think that the only ones that could be referred to as being at risk that were, these are assessments now that we're talking about or claims, that were validly made during the three year period, before it had closed, that would be at risk would be those the might be foreclosed from collection by the six-year statute of limitations." CHAIRMAN VEZEY: "Representative Davidson." Number 301 REPRESENTATIVE DAVIDSON: "Thank you. I think Representative Hudson asked a very important question there so, I'd like to ask, if I may, what I heard you say in response to his question, and my understanding of the question was, if the appeals was started and resulted in an increased amount for the state but the three year period ran out, then the appeals process was completed after that three year chronological goal line that some people can reach for advantage, you're saying that then, it's your understanding that the six year period kicks in because despite the fact that the appeals process was not complete within the three year goal line, it's too bad for the state, you just lost that money? Or did you say that the state can, in fact, go ahead and collect that increased amount because there's still that six year period?" MR. WESSELLS: "During the appeals process, there's no final, if I understand, Mr. Chairman, the question correctly, the appeals process is the period of hearing or during which a formal hearing takes place where there's an informal conference concerning the tax liability, and it proceeds and continues until there is a final determination - an administrative determination that is made by the Commissioner of Revenue. As I stated in my testimony, it's pretty clear in the statutes that, during this period of time, at least by our interpretation, during this period of time, the six-year statute of collections is running. It runs from the date on which the assessment is received, for six years. That sets the time limit for the Department of Revenue to get the appeals process completed. Mind you, the Department of Revenue can make a final administrative determination any time it wishes to during (indiscernible). It can issue a letter saying, `we've listened to your complaints, this is our final determination,' so it is not necessarily within the power of the taxpayer to prolong this process in such a way that it can say, `Aha, you haven't collected.'" REPRESENTATIVE DAVIDSON: "And so, Mr. Chairman, at that point then, in your response to Representative Hudson's question, it was my understanding that the appeals process on the amount to be determined for the assessment was not complete. Now, you're telling me that, well hey, the commissioner can just, two minutes before the time the three years period is up, say, `This is what you owe' and then we get into the six year period. Is that what you're saying?" MR. WESSELLS: "No. The question that I was responding to was, `What is the nature of the, and what is the time that it takes to, or what is the nature of the appeals process and the length of it' and my response that that is within the power of the Department of Revenue to determine." REPRESENTATIVE DAVIDSON: "But, Mr. Chairman, Representative Hudson asked the question and the way he formed the question was if the appeals process - if there was an appeal running, and that was not complete at the end of three years, and then from what I heard this man say it was, `but the state still has the right to collect on that increased amount, because that six year period is still running.' Now he's saying that the guillotine of the three years came down on the goal line -I mean, it's very confusing here, I'd like to have some clarification from the answering of his question or if you could shed some light on this (indiscernible), I'd appreciate it." CHAIRMAN VEZEY: "I didn't quite hear it that way, Representative Davidson. Is that question in Representative Davidson's mind clear to you, Mr. Wessell?" MR. WESSELL: "Not at all. If I might give a try to a response that would..." CHAIRMAN VEZEY: "I think he's saying that you're (indiscernible) on what can happen during the appeals process. I haven't heard that, but that's what he - I believe that's what you're saying, is it - you're saying that you heard two different testimonies on what can happen during the appeals process." REPRESENTATIVE DAVIDSON: "Essentially." MR. WESSELLS: "Let me try to set the record straight and clear on this. As I said in my prepared testimony, the statute of limitations sets a nine year period from the time a return is filed. There is an initial three year period that the Department of Revenue has to issue an assessment or claim for additional tax. The Department of Revenue then has six years from the date of that claim, if it is valid, if it falls within the three year period, to collect, to get that case into court for collection. It's not actually to collect the money, but to get the case out of the appeals process and into the court proceeding for collection." CHAIRMAN VEZEY: "Does that answer your question, Representative Davidson?" REPRESENTATIVE DAVIDSON: "Well, it's still a little fuzzy, because it seems like that's not the way Representative Hudson asked the question." CHAIRMAN VEZEY: "No, Representative Hudson didn't ask the question that way, you're correct." REPRESENTATIVE DAVIDSON: "Well, what I heard Mr. Wessell just now say is that...well, he still didn't make the definitive separation between what he means by the end of the three year period and beginning of the six year period, as it affects an appeal in progress." REPRESENTATIVE PORTER: "Mr. Chairman." CHAIRMAN VEZEY: "Representative Porter." REPRESENTATIVE PORTER: "If I may, that's the dispute." REPRESENTATIVE DAVIDSON: "Fair enough." CHAIRMAN VEZEY: "Representative James." Number 309 REPRESENTATIVE JEANNETTE JAMES: "Thank you, Mr. Chairman. Mr. Wessells, let me explain to you how I understand the statute of limitations works and then I'd like to hear your response to what it is. My understanding of the statute of limitations on assessments is to provide a period of audit time to be able to get a determination of whether, in fact, the taxpayer owes additional money or not, when an audit is in process. And during that period of time, then the state may ask the taxpayer to extend time because they haven't been able to sufficiently complete the audit in that period of time. Providing that the audit then is concluded and an assessment is given, that then the six-year statute clicks in and says that within that six year period of time, any appeals or decision making to determine whether that is a final assessment or not, agreed to or not, by the taxpayer during that six year period of time, if that hasn't happened then have to file an action in court. And once the action in court is filed then, of course, the clock is tolled until the decision of the court. We know those can go on for years. If I understood what you were answering Representative Davidson's question was this scenario, that if you had extended the three year period and maybe you'd extended it for two years or three years, or any indefinite length of time, but shortly after the extension that they filed the assessments, and you appealed. And you're still within either that three year period or an extension of that three year period, and if then they came up with another way of doing the calculation which included more money, that you would think they were still within the time frame to do that." MR. WESSELLS: "Absolutely." REPRESENTATIVE JAMES: "But, if in fact your extension of time or the three years had gone by and they decided then that there was a change in their interpretation or a change in something that they wanted to increase the assessment, that they're barred because the statute of limitation has gone by. Problematic to me, and here comes my question, problematic to me is, is what I've been hearing in the testimony here is that, the state believes that as long as they have an assessment in (indiscernible) the three years, that they can continue to - and this assessment because of the relation back doctrine, which actually says as long as they're still assessing, that the statute of limitation is not there at all. In other words, it isn't even a statute of limitation, it just goes on and on, as long as they were able to get something in there in the beginning. And then essentially on beside that, the six years doesn't even start to toll until a final decision has been made or not, and you go to court. I'm trying to figure out, and this is my question to you: Do you think that what has been happening is, a total disregard for the statute of limitations, as I understand it?" Number 425 MR. WESSELLS: "Mr. Chairman, if the interpretation of the three-year statute, which I think the Department of Revenue -the interpretation that the Department of Revenue ascribes to the three-year statute, which I think you've described correctly, and that is, that once an appeal has been filed, that the statute of limitations on assessments is effectively suspended, which is essentially what is in this legislation, in Section 1 of 377, is a disregard, I don't know if I'd call it a disregard, I think I would call it an incorrect interpretation of the existing three-year statute of limitations. And actually, and that is not a proper interpretation of it." REPRESENTATIVE JAMES: "A follow up if I might, Mr. Chairman, and that is that, would you agree that the six- year statute of limitations from the date of the assessment to the closure or the blocking of collections is intended to bring closure to the appeal process?" MR. WESSELLS: "I think so, yes." REPRESENTATIVE JAMES: "So that would then mean that because the appeal was in process that the clock would not be - that that clock still should be ticking, because that's the purpose of (indiscernible) to close that assessment period, I mean, appeals period." MR. WESSELLS: "If there is no other - right - if there is no other rule, if there's no other law, statute, regulation or otherwise, that requires the Department of Revenue to close the appeal process by issuing a final determination, then the only one that will close it potentially, will be the need for the Department of Revenue to get its case into court for collection, which is regulated by the six-year statute on collections." REPRESENTATIVE JAMES: "Thank you." CHAIRMAN VEZEY: "Thank you. Mr. Wessells, it's 10:15. I'd like to take a break at this time. Can we come back to Representative Davies and Davidson - can you come back say at a quarter to eleven." REPRESENTATIVE DAVIDSON: "Absolutely." CHAIRMAN VEZEY: "Thank you. We'll come back to order at a quarter to eleven." REPRESENTATIVE DAVIDSON: "Mr. Chairman, can I just remind you that ......." CHAIRMAN VEZEY recessed the meeting. Number 495 CHAIRMAN VEZEY called the meeting back to order at 10:47 a.m. on May 14, 1994. "We're in the middle of taking testimony from Mr. Wessells. Mr. Wessells, I believe we next have a question from Representative - you had a comment, I'm sorry." Number 497 MR. WESSELLS: "May I, Mr. Chairman if I could beg your indulgence, I'd like to do what I can to clarify some things, I think, that were left unresolved when we recessed. Concerning the question of the so-called appeals process and when it begins, and the status of the three-year statute of limitations during that period of time. If I left the impression that there's a bright line that exists between the audit and the appeal, that is not actually the case. The way the process works is we receive assessments during - invalid assessments - during the period that the three-year statute of limitations is open. And when we receive those, we do have the 60-day period from the time of receipt, to either pay them or to file a protest and appeal them. And indeed we do that. It is also quite likely that in a circumstance such as that, the three-year statute of limitations will remain open, because we have extended it - we've granted extensions during that period of time and indeed we have received assessments during - a separate assessment during that period of time, which is actually after the first protest an appeal was taken, so it's a series - there's the possibility of a series of assessments and appeals co-existing at the same time, with respect to the same year. They, in effect, become separate processes. There's not one single, necessarily one single bright line that separates the two. And, indeed, any assessment that would be made during the initial three year period, or period after that, which is subject to an extension of the three year period, would be a valid assessment and is not in question. The other matter that I wanted to clarify was with respect to the holdings in the Exxon case in Superior Court. There was a point that a - there's a footnote in that case, that says that constitutional claims are not valid. Indeed the court didn't even deal with any constitutional issues, because it held for Exxon on the basic interpretation of the statute and did not have a need to deal with the constitutional issues. So there were no constitutional issues decided in that case." CHAIRMAN VEZEY: "Thank you, and I certainly - I did not interpret your testimony as applying that the appeals process was a neat line. I think to the contrary, that the testimony has been that it is a complex area." MR. WESSELLS: "It is also true that the law, there is a case dealing with the six-year statute of limitations in Alaska; which is the Tesoro case which holds that the six- year statute of limitations is tolled; that is it does not run or begin to run until after a final administrative determination is made." CHAIRMAN VEZEY: "Thank you. Representative John Davies, you had a question of Mr. Wessells." REPRESENTATIVE DAVIES: "Well, he just answered one of them. I was going to ask him about the Tesoro case, because I think that your original testimony about sort of a nine year total statutory - statute of limitations picture, would only be true in a very idealistic circumstance where there were no protests filed. If there's a protest filed, at least according to the Tesoro case, as I understand it, if there's a protest filed or an appeal of the assessment issued at the end of the three-year statutory period, then while that is being adjudicated and decided in some way as to what the final amount is owed, once that's determined, then if I understand the Tesoro case correctly, then the six-year statute begins to run on collections. Is that correct?" MR. WESSELLS: "That's a correct interpretation." REPRESENTATIVE DAVIES: "So that was one, Mr. Chair. The other, if I might. Going back to Representative Hudson's question, there are it seems to me, amounts of tax at issue, maybe you didn't like the word `risk,' but at dispute or something like that, that had to do with the three-year statute, which would be those amounts that were included in an assessment that were issued after the three-year statutory period had ended, and during this extended appeal process. I mean after all, that's really what we're arguing about, here. I think that's the major issue of dispute between the industry and the state, is whether you can up the assessment after the three-year statute has run. Is that not correct?" MR. WESSELLS: "That's correct." REPRESENTATIVE DAVIES: "And so, to the extent the state has issued assessments that upped the ante, those amounts are at dispute, isn't that correct?" MR. WESSELLS: "It is those amounts..." REPRESENTATIVE DAVIES: "No the underlying amount, the ones that were filed timely during the three year period." MR. WESSELLS: "During the three year period, that is correct - it's the increment." REPRESENTATIVE DAVIES: "But there is a significant increment on the order - total of a billion dollars." MR. WESSELLS: "I can't verify the amount in any way, because I don't have all the information at my disposal." REPRESENTATIVE DAVIES: "At least, Mr. Chair, it's my understanding that that increment relates...." CHAIRMAN VEZEY: "We're taking testimony from this witness, so we can debate the....." REPRESENTATIVE DAVIES: "Well, I guess, with respect to what Mr. Wessells has said, is that he does agree with me that there is at issue or debate a significant amount." CHAIRMAN VEZEY: "Please, Representative Davies, let's limit it to questions of the witness." REPRESENTATIVE DAVIES: "Well, I just want him to - I want to make sure that he and I - that we agree on what we agree on and disagree on what we disagree on. I want to understand, does he agree with the statement that I made that there is a significant increment that's over and above the original assessment that was issued during the three- year statute. Is that correct?" MR. WESSELLS: "There is an increment, certainly, in BP's case. The significance of it in total is what I can't really testify to." REPRESENTATIVE DAVIES: "Okay." MR. WESSELLS: "In terms of - and I think the question that is being asked is the total magnitude of the significance, and I don't know the answer." REPRESENTATIVE DAVIES: "Okay, that's fair." CHAIRMAN VEZEY: "Thank you, Mr. Wessells. No one else has been able to answer that question either, so. Representative Sitton, you were next." Number 550 REPRESENTATIVE SITTON: "Thank you, Mr. Chairman. I'm not sure we're dealing with the real problem here in our discussions. I continue to be intrigued by the process and how come our assessments aren't nearly always on the mark. How come there's always debate and argument over the assessments that come down. Is there something in the process, in your view, Mr. Wessells, that we should be looking at, while we're on this subject, or am I just misunderstanding the whole thing because (indiscernible)." Number 565 MR. WESSELLS: "I think that there will always be disputes about tax liability in many jurisdictions. The laws are often complicated, underlying facts are often detailed and complicated, and I think that it is a natural outgrowth of the law itself that this will occur. I will say that in our experience as a company, the problems in resolving those sorts issues in Alaska have been exceptional and I think that indeed, we are making efforts presently, with the Department of Revenue to try to get some clarity in the way that the tax is calculated and in a way that we can agree, so that we do get ourselves out of this box for the future of having to have these periods go on forever to try to resolve these issues. So, I think the issue, the problem that you're talking about is being addressed and I think it's being addressed in a constructive sort of way." CHAIRMAN VEZEY: "Representative Hudson." Number 605 REPRESENTATIVE HUDSON: "This is a question that I've been wondering about and that is, if the legislature were to pass this law and the court hears the ruling of the lower court and upholds it, where are we then? I mean, because if we pass the law, then it would be in conflict with the lower court, and as affirmed by the Supreme Court's holdings, you know it would be directly in violation of the court's interpretation of the law. So I wonder where we would be at that time?" CHAIRMAN VEZEY: "Representative Hudson, I think it's very important to point out that we can only ask the witness's opinion; that is a decision that only the Supreme Court (indiscernible)." REPRESENTATIVE HUDSON: "(Indiscernible) don't answer it, maybe somebody else, maybe the attorney general, or somebody else can comment on (indiscernible)." Number 630 MR. WESSELLS: "Well, I'd like to know the answer to that, too, Mr. Chairman, but I think it's - I think one of the reasons why passing this particular law would be bad, is because there's a very strong possibility that, and I think it was articulated well yesterday by Mr. Sullivan, that the case will not be heard by the Supreme Court, and in effect, the decision will have been made by the legislature." CHAIRMAN VEZEY: "Thank you. Representative Davidson." Number 645 REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. Mr. Wessells, would you clarify your last statement that the case would not be heard by the Supreme Court." MR. WESSELLS: "The status of the case, as I understand it, is this. It is on appeal to the Supreme Court by the Department of Revenue. I would think it would be likely that, should this legislation pass, the department will withdraw its appeal, in which case the court would not have anything to decide. Because they will have been told that law that existed or that they were to interpret, no longer existed, it had been retroactively repealed." Number 670 REPRESENTATIVE DAVIDSON: "Is it your understanding that the constitutional issues that were raised by both Mr. Sullivan and yourself then would not continue as well, because you'd already agreed, I think, that there was a due process consideration by parties like yourself." MR. WESSELLS: "Well, those issues are not before the court presently. Because they have not been - they are not issues in that particular action. They would not be issues until this law were passed, if it is." Number 690 REPRESENTATIVE DAVIDSON: "Well, that's an interesting statement, because it's my understanding that the contention of Mr. Sullivan yesterday is that his constitutional rights were being denied and (indiscernible). Mr. Chairman, the question I had was, in your statement, Mr. Wessells, you talked about - this is exactly what you said `The six-year statute currently sets a time limit how slowly the department can consider and decide a tax appeal,' but you said then, but under the administration's proposals the six clock won't be running while the department considers the appeal. Isn't that statement a bit - well, I can't think of an adjective - but, I mean, the department does not consider the movement of legislation in the courts, right? Isn't that the judicial branch that sets how long it takes for the process would occur. And once we get to the courts and the clock is running, and that was the point I was trying to make earlier, what pushes your company or industry's pace in court proceedings?" MR. WESSELLS: "Mr. Chairman, I think the best way to answer the question to make the point that, a tax appeal is a quasi-judicial process. An appeal is heard and decided by the Department of Revenue, an administrative body which is not a court, and there are no specific rules of how the Department of Revenue and the commissioner is to function in the disposition of those appeals. It's at, essentially, the discretion of the commissioner; although there are - while there not being any particular rules that do exist, there are some basic issues of fundamental fairness we should apply to the process, because at the end of the process, there is a decision or a final determination, which effectively has substantial weight in court, and that is that essentially all the fact-finding has been done during the course of an administrative appeal. There is no new trial on the facts after the administrative appeal. And consequently, the fact-finding is subject to some rules of fairness. But to answer the question, it is not strictly a court proceeding." REPRESENTATIVE DAVIDSON: "Mr. Chairman, I have one final question, if I may." CHAIRMAN VEZEY: "Please." REPRESENTATIVE DAVIDSON: "Mr. Wessells, well we know that the SOL, I understand, was enacted in 1976. If we were to delete from statute what was enacted in 1976, what do you think would be the result? We certainly would clear up these kinds of issues, right? Or would we? What would be your response?" MR. WESSELLS: "Well, certainly the issues would be cleared up in the sense that the taxpayers could not claim, as defense, that a statute of limitations barred any assessment, I think, or collection, for that matter. I think that the result would be that it would be very difficult for taxpayers and the Department of Revenue to resolve differences about tax liability and (indiscernible) administrative process and that the degree of litigation that would exist, with respect to these sort issues, would be multiplied substantially." REPRESENTATIVE DAVIDSON: "Did the industry help, in fact, enact that legislation back in 1976." MR. WESSELLS: "I have no knowledge of that, Mr. Chairman." REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman." CHAIRMAN VEZEY: "Representative Nordlund." REPRESENTATIVE JIM NORDLUND: "Thank you, Mr. Chairman. Mr. Wessells, I'm looking at a letter here from John Morgan, it's an open letter to the public here in the Daily News, and one of the items in here, is paragraph #4, in which BP has been trying to find a way to compromise on 377. And there's a statement in here that says that, `we offered to settle our disputed taxes on the same basis as ARCO.' In talking to the attorney general, he said that they would love to make the same deal to BP that they made to ARCO. I'm just wondering if you could expand...." CHAIRMAN VEZEY: "Representative Nordlund, your line of questioning is out of order. You encroaching on an area of settlement negotiations. You missed all the testimony this morning. Please limit your questions to the statute before us, the witness and his expertise. We will stay out of the area of the courts of Alaska." REPRESENTATIVE NORDLUND: "Well, Mr. Chairman, the company brought it up in the letter to the public..." CHAIRMAN VEZEY: "Representative Nordlund, that's fine, but we are not going to go into the area of settlement negotiations and attorney-client privileged matters in this hearing." REPRESENTATIVE NORDLUND: "Mr. Chairman, I think that the witness may be able to answer this question without revealing any of the details of the negotiations." CHAIRMAN VEZEY: "Do not - Please proceed very carefully. You can ask questions, but not in regards to settlement negotiations." REPRESENTATIVE NORDLUND: "Okay, Mr. Chairman. Mr. Wessells if you can answer this question without revealing anything you feel is proprietary, I'd appreciate that." CHAIRMAN VEZEY: "If it's a question about the progress or the nature of the settle negotiations......(end of tape) TAPE 94-65, SIDE A Number 001 REPRESENTATIVE DAVIDSON: "Yes, thank you, Mr. Chairman. Mr. Wessells, I got a letter from Mr. John C. Morgan, President of your company, and in his letter he says, `Everywhere in the world we conduct business, we must agree on the rules with the host government settle on a system to resolve disputes that may arise from time to time." CHAIRMAN VEZEY: "Representative Davidson, could you speak up a little bit, you're talking down to the table." REPRESENTATIVE DAVIDSON: "I have a letter from your president of your company and he talks about how they work toward agreement on the rules in a host government, so as a host to your company. If the legislature were to pass this law, does that mean that you would find it within the policies of your company that you would be able to live with this legislation that we're discussing today?" Number 027 MR. WESSELLS: "Well, our company will comply with the laws of the areas that we operate in, no matter whether we agree with the propriety of those laws, that is our deal and our license to operate in a particular host environment, is to comply with the law." REPRESENTATIVE DAVIDSON: "So you would find a way to live with this legislation where..." MR. WESSELLS: "We comply with all the laws." REPRESENTATIVE DAVIDSON: "Thank you. Thank you, Mr. Chairman." Number 043 REPRESENTATIVE ULMER: "Thank you. Could you tell me the first time the industry raised this statute of limitations as a defense to paying tax claims in the state of Alaska." MR. WESSELLS: "I can't answer that question with respect to any company other than BP. The first time that I am aware of it with respect to BP, with regard to our 1978 tax return for the oil and gas income tax, there was a reference made yesterday to a case that was the Standard Alaska Production Company case that was a declaratory judgment action decided by the Supreme Court in 1989. That was with reference to that particular year. That was a case in which we asked for a declaratory judgment. By the way, Standard Alaska Production Company is the same company as BP Exploration, it's just that the name was changed in 1988, 1989 and that is the one that I am familiar with which I would say was the first time that issue was raised, certainly by our company." REPRESENTATIVE ULMER: "In 1989?" MR. WESSELLS: "No. The issue was first raised, I believe, and I can't be precise about this, but it would have been raised in the period of say, around 1984." REPRESENTATIVE ULMER: "It was raised but was not litigated?" MR. WESSELLS: "As a defense." REPRESENTATIVE ULMER: "Okay, but it was not litigated at that time?" MR. WESSELLS: "The litigation began because we were seeking a declaratory judgment of the three-year statute of limitations bar certain assessments for that year. So I'm sorry I can't be precise about the dates but it was certainly an issue that we were pursuing as of around..." Number 090 REPRESENTATIVE ULMER: "So this is now ten years later. Why was there no resolution of the issue between 1984 and 1994? For some reason did those cases get settled and so you avoided the necessity for a decision at that point or..." Number 096 CHAIRMAN VEZEY: "Representative Ulmer I'm going to allow your question. It is very repetitive of the questions and answers we had yesterday. I will allow the witness to continue, but the questioning is getting extremely repetitive and I would ask members of the committee to be attentive and to not track back over ground we've already covered." REPRESENTATIVE ULMER: "Well, we didn't have BP before us yesterday, so..." MR. WESSELLS: "The Supreme Court, in 1989, decided that they would not declare the statute, would not give an interpretation of the three-year statute because BP had not, as it say exhausted all of its administrative remedies so that it was necessary for BP to return to the Department of Revenue and resolve this and get a finding from the Department of Revenue and the hearing process on this particular issue before any court in the state would entertain the question. And that is why there was no resolution at that time." Number 122 REPRESENTATIVE DAVIDSON: "Thank you again, Mr. Chairman, you have been very generous. Mr. Wessells, referring again to Mr. Morgan's letter of May 9, Item number 4 says, `We've been trying hard to find a compromise on Senate Bill 377.' And he goes on, he says, `Due to the constructive efforts of speaker Ramona Barnes to find this compromise, they included an offer to use the six-year limit and an offer to use the royalty valuation basis used for past settlements.' But is it not true that the royalty valuation does not in fact include anything at all as regards to transportation cost? So wouldn't that be kind of a, a very misleading or at least unfair, as far as the state and your company is concerned for considering that kind of compromise?" MR. WESSELLS: "Well, I wouldn't regard that as unfair. The issue in the royalty litigations was settled by an agreement was the value, at the same location that oil is valued for tax purposes, of the value of the oil, the same barrels of oil for royalty purposes. So it is an indication of a valuation that the state has found reasonable in a context of its claims and its rights with respect to royalties." REPRESENTATIVE DAVIDSON: "So you do not see, really then, a differentiation between the value of oil as it is decided in royalty cases and as it is decided in tax cases?" MR. WESSELLS: "Same oil." REPRESENTATIVE DAVIDSON: "Same oil, same value. Thank you, Mr. Chairman." CHAIRMAN VEZEY: "Thank you. Seeing no further questions, Mr. Wessells, thank you very much for your time this morning. I appreciate your being with us. Next, I'd like to hear from the Commissioner of Revenue if he is prepared or wishes to testify. I certainly wouldn't coerce him to if he didn't want to." Number 168 DARREL REXWINKEL, Commissioner, Alaska Department of Revenue: "Mr. Chairman, I would be more than happy to do that. I know Mr. Hosie, who testified in front of you yesterday, does have a plane to catch at 1:00 p.m. so that he can get prepared for this tax case that is going to be heard next week. And if it would be with your permission, if he could have a few follow-up comments, I'd appreciate it." CHAIRMAN VEZEY: "Certainly." Number 182 MR. SPENCER HOSIE: "Thank you, Mr. Chairman, I appreciate your indulgence. As the commissioner mentioned, we have a Supreme Court argument to prepare for and that brings me to my first point in rebuttal. Contrary to what Mr. Sullivan said explicitly, and to what Mr. Wessells said by implication, that Supreme Court case will go forward next week regardless of what this body does or what happens to this piece of legislation. And for that matter, if this piece of legislation is passed, the Supreme Court will still necessarily decide the pending issue. There is a rule in this state that issues of statutory construction are always decided before issues of constitutional magnitude. That means that this Supreme Court will decide the issue of 260 regardless of what happens with this litigation. Let me say this plainly. The Supreme Court argument will go forward next week, regardless of what happens here. The attorney general will not fly to Anchorage waving a piece of legislation saying this case is now moot. It would not be moot. With that, let me turn to several other points." Number 200 CHAIRMAN VEZEY: "If you would, Representative Porter would like to ask a question, Mr. Hosie." REPRESENTATIVE PORTER: "Would it not be moot because the law is not effective yet or is it your position that even after the law became effective that it would not impact the case?" MR. HOSIE: "Mr. Chairman, if that law were effective today, that case would not be moot. The reason for that is that the Supreme Court will have to decide whether the statute of limitations, Section 260, permits amendments to timely issued assessments. That question will always and necessarily be reached before any constitutional question, and the witnesses from BP and Exxon have both testified that there will be a lawsuit filed, challenging the constitutional basis of this legislation, should it pass. So before that constitutional question is reached, the Supreme Court would pass on the first question, the threshold question, of whether Section 260 permits amendments. That issue would not be rendered moot by this legislation even were it effective as we speak." Number 220 CHAIRMAN VEZEY: "Mr. Hosie, there is only one attorney at this table, so please bear with us. What you're saying is a policy decision of the state of Alaska, that they will not withdraw this case before it is heard, regardless of what happens with this legislation." MR. HOSIE: "Mr. Chairman, more than a policy, it's a rule of law, and the rule is that if the Supreme Court can dispose of a case on a statutory ground, that is by interpreting a statute, it will always do that before reaching further to address constitutional issues. The Supreme Court is reluctant to reach constitutional issues and won't do it unless it has to. For that reason, it will first address whether Section 260 permits amendments. That will be true whether this legislation passes or not. That will be true whether the legislation has an effective date of yesterday or six months hence." CHAIRMAN VEZEY: "...and I understand what you're saying is the Department of Revenue would not ask the court to withdraw the case." MR. HOSIE: "That is absolutely right, Mr. Chairman." CHAIRMAN VEZEY: "Representative Porter." Number 240 REPRESENTATIVE PORTER: "I am still trying to get in my mind the effect of this. If the case is not withdrawn and this law in its present draft form is passed, it seems to me to be two positions working against each other. One, if for example, the Supreme Court were to say, were to uphold the Superior Court's decision, they would say that a certain portion of these claims have dropped off. The law we are here to pass, and hypothetically has passed, would say `no, they go on.' How is that resolved?" MR. HOSIE: "That, Mr. Chairman, is resolved in a two-step process. The Supreme Court first looks at and answers the threshold question, `does the statute permits amendments?' If it says `yes,' the case is over. What the department has done is proper. If it says `no,' only then will it reach the question of whether Senate Bill 377 somehow changes that result. But the efficacy of this legislation, Senate Bill 377 will not be reached until after the Supreme Court decides the underlying question of whether amendments to a timely assessment are themselves timely. And I don't think anyone from the industry would disagree with that statement of law." Number 265 REPRESENTATIVE PORTER: "If I may, Mr. Chairman, just one more follow-up. The effect, then, of assuming state's policy to pursue what this law would apparently provide if it were passed, they would pursue a subsequent court decision that would, if the Supreme Court in the case that you will be arguing shortly, decides against the state's position. They would be arguing against that decision?" MR. HOSIE: "Yes, the case... Mr. Chairman, the case will go forward and Exxon will make its points and the state will make its points." REPRESENTATIVE PORTER: "So while passing of this legislation would not prevent the hearing, it could set up the scenario to attack its decision if the decision were in favor of supporting the Superior Court decision." Number 280 MR. HOSIE: "Mr. Chairman, if the decision were in favor of the taxpayers, then the Supreme Court would reach the further question of whether this legislation should change that result as an expression or a clarification of pre- existing legislative intent. But that question will always come second." CHAIRMAN VEZEY: "Representative Green." Number 287 REPRESENTATIVE JOE GREEN: "Thank you, and I hate to belabor this but this is a little different spin than we'd heard earlier. So, for an old head like me then, that Representative Porter's questioning would say that after they have, perhaps, decided in favor of the payer, they reach down and look at 377 and that not only would affect future but it would retroactively affect what may have happened just prior to this even though this may not become law until during the court hearing." MR. HOSIE: "Mr. Chairman, that's right." REPRESENTATIVE GREEN: "Okay." MR. HOSIE: "If it gets to that point then the Supreme Court would have to answer the question of whether this legislation is effective in clarifying pre-existing legislative intent." REPRESENTATIVE GREEN: "Well that's what I thought you said, I just want to be sure that -- thank you." MR. HOSIE: "But the larger point is that the case is going to go forward. That case will be argued next Wednesday." Number 306 REPRESENTATIVE JAMES: "Thank you Mr. Chairman. If I'm understanding you right, is that that you're saying that the decision, or the oral argument that you're going to make in this case next week is going to be based on the existing statute and not on the legislation that is proposed to be passed at this time. Your oral argument is going to based on the existing statute and the decision of the court is then going to be made on oral argument that does not include any oral argument that is included in SB 377. No fuel for that. Then you're saying that if the court makes a decision that finds with the taxpayer the next step would then be to say, `now you can bring in this evidence that the legislature passed this statute with a declaratory provision that this is what this always meant from 1976 to now.' And then the next step would be, I believe, and this is my question to you, would that not be a deprivation of due process for the taxpayer if we, the legislature, stepped in and made a declaratory statement of what this meant superceding what the court's decision might be, and wouldn't we maybe be interfering with... from one part of, from the legislature to the judicial branch by doing that?" MR. HOSIE: "Mr. Chairman, no. If the 78 Exxon case now pending goes to decision before this legislation is passed and if the case is decided on the briefs as now filed, that's a done deal. That case is over. And so for 1978, for Exxon, that issue would have been disposed of before this, the question of the efficacy of this legislation was even reached. The legislation would be relevant to similar issues with similar taxpayers for other years but this is not a situation where a taxpayer will be denied due process." REPRESENTATIVE JAMES: "If I might follow-up then, Mr. Chairman. The presentation that was made to us yesterday was that the Exxon case, which you were testifying about, which was based on the three-year statute of limitations dispute was one billion dollars on the table that would be lost if we don't pass this piece of legislation and now you are telling us that is not the case, that the court is going to make the decision based on their interpretation of the existing law. And that the taxpayers will get their day in court and due process will not be objected to. So then that throws off, that gets us back down, now we're talking about two billion not three billion, which we've been telling everybody that we have at risk." MR. HOSIE: "Mr. Chairman, that's a very good question and it raises an important point of clarification. The case pending before Supreme Court involves one taxpayer - Exxon; one tax year -1978; and a relatively small sum of money -- a couple million dollars. The effect of that decision will be to set a precedent, an immutable precedent that would be quite clear, that would dispose of the much larger dollars at risk in other similar cases. It is, in essence, a test case. And so, even though it's just one taxpayer and one year with small dollars, it's going to resolve this question once and for all." Number 362 REPRESENTATIVE JAMES: "If I might, Mr. Chairman, follow-up on that. Wouldn't you believe that at this stage of the game, that the smart decision is to let the court decide?" MR. HOSIE: "Mr. Chairman, the court will decide, which is the point I started with a few moments ago. The court will decide whether Section 260 permits amendments. If this legislation is passed, at some point in the future, the court will have to decide a further question; whether the legislation changes that outcome." CHAIRMAN VEZEY: "Another question, Representative James?" REPRESENTATIVE JAMES: "Yes, I have one more question and it has to do with the same issue because, based on what you've told us now, which is, as I agree with Representative Green, is not the presentation that I understood to have been made yesterday, that I believe that court precedence will and may take precedence over any statutory change that we might make that backed up. But the other part of that, that has come out in the testimony is the $3 billion that is at stake, which seems to be the reason why it's so important for us to pass this piece of legislation. As far as I would understand it, that based on that court decision (indiscernible--coughing) billion dollars is hanging on, not the decision that we are making this -- this, this, but not this. So, that billion has nothing to do with whether or not we pass SB 377. Now the other issue, as we also heard testimony, that the division of the $3 billion is $1 billion on a three-year statute and $2 billion on the six-year statute, and we've also heard testimony that the taxpayers have agreed to not call the six-year statute into play in their decision. So, then, what does that do with the $2 billion that is out there based on the six-year statute and you also have a lower court decision that says that your interpretation of the six-year statute is okay." Number 392 MR. HOSIE: "Mr. Chairman, three points in response. First, the Exxon case is a test case on the three-year statute, which is the $1 billion. As a legal matter, it will dispose of that $1 billion. If the Supreme Court rules in the state's favor, that ends it. If the Supreme Court rules in the taxpayer's favor and this legislation is passed and the taxpayer's (indiscernible--coughing) adjusted and filed a constitutional challenge, that will be another issue that the Supreme Court would then have to reach. And so the $1 billion is presented via a test case now. And that will be heard next week." Number 402 REPRESENTATIVE JAMES: "Then just one follow-up question. Then can't I assume that the $3 billion that we have been told is the reason for passing SB 377 now, is not necessarily the case, and that the court will make a decision and that whatever the court decision is, in this case, will be defining for the rest and the collection of that $3 billion?" MR. HOSIE: "Mr. Chairman, no, for two reasons. The Exxon case involves a three-year statute but the issues in the three-year statute and the six-year collection statute are very similar. The Exxon case will address directly the three-year statute, but by implication will have a dramatic outcome on the two billion. So it's going to take care of the one billion, one way or the other, for sure, but will establish a precedent that will carry a lot of weight on the pending six-year collection issue which involves the larger two billion. But it's just a test case. It's not a class action with all taxpayers and all tax years and all tax types. So that remains out there. Second, this legislation, according to the industry, may or may not be effective. They are not going to concede to you that this legislature can look at Section 260 and say, we are going to declare prior legislative intent and be bound by that. If that happens, this bill is passed, the industry is going to say, `well it doesn't matter, it's a different legislature, it's not binding, it's retroactive, there are due process violations,' and that's a separate fight that hasn't been briefed yet and hasn't been presented yet." Number 428 REPRESENTATIVE JAMES: "Just one follow-up, Mr. Chairman, thank you for giving me this extra time, and I've almost forgotten my question." CHAIRMAN VEZEY: "Snooze you lose, Representative James." MR. HOSIE: "I think it's my answers, Mr. Chairman" CHAIRMAN VEZEY: "Representative Hudson." Number 431 REPRESENTATIVE HUDSON: "Mr. Hosie, if the Supreme Court, the Superior Court, the Supreme Court upholds the lower court's decision, wouldn't we, by the passage of this legislation, then be left with the more expensive parts of the bill such as the amendments that deal with the NGLs and the present value and those kinds of things which clearly have a detrimental effect on the treasury of the state of Alaska?" MR. HOSIE: "Mr. Chairman, good question. As I understand the question, the point is that, if you're telling me that this legislation doesn't necessarily solve the problem, why then pay the price of admission with the other provisions that the industry seems to prefer? The answer is that although this bill doesn't necessarily solve the problem, I think that the state is going to prevail in the anticipated constitutional challenge. I think that this legislature has absolutely the power to look back and clarify the intent of a prior legislature and what a statute means or doesn't mean. And that's what this case is about. It's about what that 1976 statute means and doesn't mean. And who better to pass on legislative intent than the legislature?" Number 450 REPRESENTATIVE HUDSON: "Mr. Chairman, I am reminded of House Bill 58 (indiscernible--laughter) to pass, describing the intent of a legislature that I participated in, and we lost that thing miserably." MR. HOSIE: "Mr. Chairman, all I can say is that I trust it would not happen on this issue, but it illustrates that the court process is an uncertain process." CHAIRMAN VEZEY: "Representative Bettye Davis." REPRESENTATIVE BETTYE DAVIS: "Yea, pretty much my questions have already been asked by Representative James, but would you just, in very simply terms, tell me then what is the necessity and what is the urgency for Senate Bill 377 if it does not do what I thought you told me that it did do; what is the purpose of us being here today and not in January?" MR. HOSIE: "Because, if this bill were passed before next Wednesday, the Supreme Court would take oral arguments on the statutory question and probably remand the case for additional briefing on the effect of this legislation. And so it would take the first question of the meaning of the statute, first, but would ask for additional briefings and citations to legal authorities on the effect of this legislation. And in that context, Exxon would make its constitutional challenges and the state would oppose them. And then that matter would eventually be heard by the Supreme Court, too. Passage of this legislation now gets an answer now." Number 470 REPRESENTATIVE B. DAVIS: "May I continue please. Passage of this legislation gets an answer now. It was my understanding that you said that the threshold was that we deal with Section 260. You get that question answered and then they will deal with the constitutionality later. You didn't say when. Is it all going to come in this same trial, all that will take place? They go from one issue to the other at the same time? It won't be like at a later court date?" MR. HOSIE: "Mr. Chairman, it almost certainly would be at a later court date but fairly close in time. The court would ask for additional briefing, give the party 60 or 90 days to do that and then it would decide the second constitutional challenge. If that doesn't happen, you go back to square one, and it takes years to get these cases through the process. So if this legislation is passed now, the Supreme Court is going to give the parties an answer in the relatively near term, especially considering the alternative which is to go back to square one and have the taxpayers file a Superior Court action that will take literally years to work through the process. And so, passage of this legislation now, brings the issue to a hearing, although in two parts and gives both parties certainty in the relatively near term. That's the time-critical nature of this." Number 489 REPRESENTATIVE B. DAVIS: "So what I hear you saying then is that you're not going to take the paper and wave it and say, `Here we have this and that takes care of the court case,' but you are going to take the paper and say, `Yes we have this and this is urgent because this will now cut down on litigation, time and cost by hearing both issues in a reasonable amount of time.'" MR. HOSIE: "Yes, Mr. Chairman, that's right. The court would know about it but we would inform the court of the passage of the legislation, ask the court to request additional briefing, but of course it's not in the papers now, but that would give both parties the opportunity to brief the issue and present it to the Supreme Court in the fairly near future be it 60 days or 90 days as opposed to three or four or five years out." Number 501 REPRESENTATIVE JAMES: "Yes, thank you Mr. Chairman. I wrote it down this time so I won't forget what it was that I wanted to say. And you're saying that, you know we hear all the time when we pass legislation, `the court will decide.' You know, in fact there's been some dissatisfaction out there in the public that says, `You know, who makes the laws? The legislature or the court?' and sometimes I wonder about that. But they always say `the court will decide.' Well, it looks to me like it would be prudent since what you've just now told us, that the court - the decision is going to go forward and that the court will make a decision based on whether or not that our statutes say what they say or it is implicit that it says, by not saying it, what the department and the attorney general has interpreted it to say. So there is a decision there that's going to be made which is, the court will decide. And we should know that by next year or sometime soon. Wouldn't it seem smart to circumvent that second decision that we would have to fight in the court at that point? Because we could come back and we could make a law that says exactly, from perspectively, exactly what it is that we interpreted it to mean. And then there would be no decision once we have the court's decision that that one didn't say that or it did say that. And if it did say that, we don't have to do anything." Number 520 MR. HOSIE: "Mr. Chairman, if the Supreme Court rules in the state's favor, it would moot the need for the legislation in terms of the legal outcome. However, there are two practical problems that explain why this legislation has been perceived as urgent in time. The first practical problem: It is difficult to negotiate a resolution of these cases with this uncertainty hanging out there. If the parties are waiting for a Supreme Court decision, four or five or six years down the road, you are going to see these cases hang around for four or five or six years down the road because the parties are too far apart, given the uncertainty to come to closure. And so if the parties wish to resolve these cases, and I think both sides want to get these things behind them, we need to do something to accelerate the resolution of this important and uncertain issue. And that's why getting this thing heard before the Supreme Court now is important. So it's to accelerate any possible settlement of these major cases that are taking so much of the state's time and so much of the taxpayer's time." REPRESENTATIVE JAMES: "But, Mr. Hosie, this is a 1978 tax return. How come, in 1994, it's a real urgent hurry?" MR. HOSIE: "Mr. Chairman, because it took that long for this case to reach the Supreme Court. It took that long, and that's not at all unusual. That's absolutely not unusual. It just takes that long for a case to go through the process. And that touches on a point I wish to speak to in a moment, about whether the department controls the process or whether the taxpayer controls the process, and that's an important point of clarification that needs to be made." Number 542 REPRESENTATIVE JAMES: "Mr. Chairman, I just have a follow- up on that issue, then, is that it's my understanding that the six-year statute of limitations is precisely for that purpose; to close the appeals process and to either get it to court or not. It seems to me like that, and tolling that, totally gives carte blanche, to take as long as they need." MR. HOSIE: "Mr. Chairman, that is -- I heard Mr. Wessells say that, and we disagree. We disagree. That six-year statute, as the industry has interpreted, requires that you start to collect your judgment six years after the assessment was issued. But, if you don't have a final judgment for six years, you don't know what the final tax is, you don't even know if you're right. So you're supposed to go out and put a lien on BP's building in Anchorage before the administration process is concluded? Before they've been adjudicated to owe the state the money? It doesn't make any sense to go out and sue someone to collect a judgment before you have any judgment. Yet that's what they suggest the department does. The second point: Mr. Wessells said, `We have an absolute right to an informal hearing.' True. They do. He also said, `It's been our general, if not uniform practice, with a couple of exceptions, to exercise our right to an informal hearing, and that's their right, they can do that. Once they do that, three years gets burned up very quickly. The department does not control the timing of the process, not unilaterally. It's a consensual process. The parties have to agree to exchange documents, they've got to set up audit trips, they've got to set up deposition schedules, they've got to agree to briefing schedules, they have to get a hearing officer to set time aside for the hearing. That all takes time. And the department is not a king. It can't say, `Okay, this is the schedule.' The parties debate that. It is a consensual process to agree to the timing. And once you're in the informal process, you can burn three years up just like that. I wish it were faster, it should be faster. We've all heard complaints about how slow litigation progresses, but it is what it is." Number 569 REPRESENTATIVE JAMES: "Just let me follow-up, then. If the six-year statute of limitations isn't to make closure to this appeals process and that it only starts in when the appeals process is over, why would it take six years to take it to court?" MR. HOSIE: "Very good question, Mr. Chairman. Why have a six year period that starts only after you know what you're owed? Because the purpose of collection statutes is to give certainty that once you are adjudicated to owe someone money, they'll come and get it from you within a certain period of time. The purpose of the collection statute is to make sure people don't sit on their judgments too long. It is not to control the timing of the adjudicatory process. There are different rules for that. There are different rules for that both in the civil system and the administrative proceeding. A statute of limitations or a statute of collections, neither is designed to say okay, you have `x' number of years to get this case through trial, through appeals to the Supreme Court and decided. There are court rules that say if you delay in that process, your case can be dismissed. That's not a statute of limitations, it's a statute that requires that the parties litigate according to a certain schedule. Nor is it a statute of collections." REPRESENTATIVE JAMES: "But isn't it true that once the case is in the court that the statute is tolled. That's not a six year elimination to collect after you get into court, it's six years to get there." MR. HOSIE: "Well, Mr. Chairman, would that were true. That was the dispute in the Tesoro case. The state said exactly what you've just said, that the process tolls the six-year statute. Because how can you start to collect what you're owed until you know what you're owed. The industry disagreed. And that was litigated in the Tesoro case and was up in the Supreme Court, pending for 13 months before the Tesoro case was settled. And one other point on that: Mr. Sullivan referred to that Tesoro case again and again. That doesn't decide fully and finally this issue. It's just a Superior Court decision. It's no more final on the six- year collection point than the formal hearing decision in the state's favor in this Exxon case was. They're both intermediate or lower level courts and sooner or later the Supreme Court is going to look at that issue and until the Supreme Court speaks, nobody knows what the final rule is going to be. So that six year risk is still out there. Unless they want to stipulate to live with this Tesoro Superior Court appeal..." Number 602 REPRESENTATIVE JAMES: "Let me just clarify and see if I understand what you told me. You're telling me that in the Tesoro case, that the six years that they were saying was not running, was after the lawsuit was filed. Is that the period of time they were arguing about or were they arguing about before the lawsuit was filed?" MR. HOSIE: "Mr. Chairman, they we're saying that you have six years to start collection action after your assessment. So if you get an assessment in 1980, the Department of Revenue had better start collection proceedings in 1986, even if the case is still in the administrative process or on appeal. In other words they said, `Doesn't matter. There's no tolling. It's not suspended. You got six years to start collecting your money even if that is before you know what you're owed or whether you're owed.' And let me posit one hypothetical. If the Department of Revenue went out and slapped a lien on BP's building before a final determination of liability, I think then you'd be hearing about due process problems from the taxpayer. But that's what their position in the statute, the six-year collection statute would require." Number 615 CHAIRMAN VEZEY: "Representative Green." REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. Mr. Hosie, you said earlier that it would be years if it had to be resolved by the Supreme Court. The only time-specific that I've heard you mention, because we have been told by others that it would take a matter of five or six or seven months, you mentioned eleven months or thirteen months or some period like that in the Tesoro case. Was that before the court actually took action, or was that the time that it took the court to resolve? What was that eleven months in the Tesoro case? What I'm getting at, really, is how long would we rightfully expect to take if we allowed the Supreme Court's opinion to dictate rather than to try and intervene with statute?" MR. HOSIE: "Mr. Chairman that is, to some extent, anyone's guess. It is highly unlikely it would be more than six or eight months in a case of this complexity. Like the Tesoro case, it could be twelve to fourteen months. To answer the more specific question, that eleven month period in the Tesoro case was the period, and I think it was thirteen months, it was the period after oral argument, when the case was submitted to the court, to the time the party settled. And that was the thirteen month window, and the Supreme Court still hadn't acted. And who knows how much longer it might have taken? Who knows? And this illustrates a larger point. The parties don't control the process. You can't call up the Supreme Court and say, `Gentlemen, my clients are anxious. Could you please give us a decision?' Anymore than you can on a Superior Court level. You do that, I mean you just can't do it. You would be very ill-advised to do that." Number 634 REPRESENTATIVE GREEN: "The reason for my question was that your statement was considerably, by orders of magnitude, bigger than what we had heard yesterday. So, I'm trying to come to closure a little bit for the benefit of the committee." MR. HOSIE: "Yes, Mr. Chairman, good point of clarification. If this bill is passed and if the effectiveness of Senate Bill 377 is heard in the context of the pending case, albeit some months after this argument coming up next week, you will get a decision in the relatively near term. If it's not appended to the pending case, if it's not part of the pending case, albeit delayed by a couple of months, then you're looking at years. Literally, three, four, five, six years because what will happen is the department, the taxpayers are likely to file a declaratory judgment in Superior Court as you heard Mr. Wessells describe SOHIO did in the late 1980s and that's brand new action. They go down, they file a complaint and that just starts that process and you have got to wait until you get a Superior Court trial, then you got to wait for the decision, then you got to appeal it, and so on and so forth. And so, if the parties want to resolve these cases through negotiation, you have to do something about the uncertainty of this issue. This legislation serves to bring the issue to a head so that we know where we are in the relatively near term. And that's why it's been perceived as urgent by the attorney general's office and by the administration. I believe I...." CHAIRMAN VEZEY: "Representative Finkelstein." Number 652 REPRESENTATIVE FINKELSTEIN: "Thank you Mr. Chairman. The issue that's come up lately in this is the issue of whether the state can or whether the legislature can affirm the state's intention about an existing case before the courts. Not so much the issue whether we should, which is, you know a policy issue, but whether we can. There was an analogy made earlier to House Bill 58 that somehow the court was saying there that we can't, and that wasn't my recollection of that decision. That was a constitutional amendment where the people had voted. It wasn't analogous at all. And the issue of can, under the law, are we allowed to go in and, as a legislature, affirm the policies of the state of Alaska, things that we're operating under, essentially take a side in the dispute and say, `Our intention is that this existing policy continue.' Is there any doubt that we have the power to do that?" MR. HOSIE: "Mr. Chairman, none whatsoever. We have cases, crystal clear. The Supreme Court of Alaska Case, Federal Ninth Circuit Case. A legislature can look at a prior piece of legislation and say... and clarify the intent. After all, if the issue is what the prior legislature meant, who better to pass on that than the current legislature? Or do you want to defer entirely to the courts? Who makes law? The legislature or the courts? And so the answer is that is absolutely proper. And we can provide citations and cases." REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. Mr. Hosie, first two simple questions. Did Tesoro and Exxon, if they were not to prevail, did they then have the additional option, did Tesoro, does Exxon, if they do not prevail, have the additional option of going on the Supreme Court - U.S. Supreme Court?" MR. HOSIE: "Mr. Chairman, on the question of what the statute means, Section 260, the answer is almost certainly no. On the constitutional question of whether this legislation is effective at clarifying prior intent, the answer is probably yes. They could file what is called a petition for certiorari which is simply a request to the U.S. Supreme Court to hear the case. Those requests are almost never granted because the Supreme Court gets literally thousands of them and hears, you know, only tens of cases. And so as a practical matter the Supreme Court of this state will have the last word on the meaning of 260 and likely the last word on the constitutional questions the taxpayers have raised." REPRESENTATIVE DAVIDSON: "Would it not, because we're dealing here with an issue that began when the state had separate accounting, would separate accounting not just make a lot of these things go away?" MR. HOSIE: "Mr. Chairman, it's not a problem unique to separate accounting. It's arisen in the Exxon case in the context of the separate accounting tax. But it's a problem common to production tax, severance tax, and other taxes. It's an across-the-board problem. It's just that the vehicle that's been used to bring it to the Supreme Court is an old 43.21 or separate accounting." REPRESENTATIVE DAVIDSON: "The issue before us involves a 1979 tax filing and that was taken, as I understand, to a statutory construction court issue because you said that the Supreme Court will not go forward with a constitutional issue until they deal with a statutory construction." MR. HOSIE: "First." REPRESENTATIVE DAVIDSON: "So we've had a filing and the appeals process, the statutory construction, litigation and now the constitutional construction. Same as this case here, right? That's where we are. Now, in 260 we're trying to decide whether it is amendable. I want to know if, in fact, there's a relationship, or how, if any, Section 43.20.200 relates to 260. And the reason I'm asking is because of the sentence that says, `In the case of additional tax due by reason of modification, recomputation or determination of deficiency in a taxpayer's federal income tax return, the period of limitation on assessment commences from the date that the notice as required in 43.20.030.' Is there any kind of relationship there to 260 that impacts the amendability of 260?" Number 704 MR. HOSIE: "Mr. Chairman, not for the purposes of the dispute now. What that speaks to is the situation where a taxpayer who pays taxes in both the state and federal (tape ends) TAPE 94-65, SIDE B Number 001 CHAIRMAN VEZEY: "I couldn't quite hear the statute you were referencing. Was that in regard to Alaska's corporate income tax?" REPRESENTATIVE DAVIDSON: "It's in 43.20.200. Is that what you're talking about?" CHAIRMAN VEZEY: "43.22.100?" REPRESENTATIVE DAVIDSON: "No, it's in 43.20.200." REPRESENTATIVE DAVIDSON: "If I may continue." CHAIRMAN VEZEY: "Please." REPRESENTATIVE DAVIDSON: "Thank you very much. So if the federal government comes in and there is a reassessment, a recomputation as a result of the IRS getting involved in this period of separate accounting -- whatever happens, if the IRS comes and makes determinations that they owe the federal government new taxes, where does that leave the state with regards to this question as well as others?" MR. HOSIE: "Mr. Chairman, the provision..." CHAIRMAN VEZEY: "Before you answer that we need to clarify. I don't have the statute in front of me, 43.20 is the corporate...?" MR. HOSIE: "No, Mr. Chairman, it's not. The separate accounting statute is 43.21 and that was repealed and replaced by this statute which is the multi-state apportionment approach, and so there is really no connection between the two. That doesn't bare on the problem we have here." CHAIRMAN VEZEY: "But it is an income tax type -- it's not a production tax, which is the subject before us?" MR. HOSIE: "(Indiscernible due to static) That is correct, it is a wholly different tax regime." CHAIRMAN VEZEY: "So I guess my question is, are you sure that's germane to this subject before us?" UNIDENTIFIED SPEAKER: "Well I'm sure it's not now, but I (indiscernible--laughter)." Number 049 MR. HOSIE: "Mr. Chairman, with your liberty, may I take three or four minutes to make some very brief points in rebuttal to the testimony." REPRESENTATIVE DAVIDSON: "Mr. Chairman, I'm sorry, but my last question was the IRS thing because it all comes back, then..." CHAIRMAN VEZEY: "I thought you said it wasn't germane so I went on." REPRESENTATIVE DAVIDSON: "Oh, I see, that's okay, that's fine; I'll ask another time. Thank you." CHAIRMAN VEZEY: "Are you in a hurry to leave? There were two other representatives that did have a question of you. If you're in a hurry to leave, I'll let you make your statements and..." MR. HOSIE: "Well, with the chairman's indulgence, if I could just make these points and then perhaps we could take questions then. We're sort of covering a lot of ground but not necessarily in a sequential sense. Exxon testified that it was willing to grant extensions and, yes, Paul Sullivan has granted extensions in the past. But he might not do that tomorrow. And the question -- the policy question is, should the state's tax revenues turn on the whim, what oil company to say `yes' or `no' to an extension? Second, Mr. Sullivan criticized the state's NGL position as being unique. He said, `It's absolutely unique.' Well it is unique, but why is it unique? Because the state's -- the state's NGL gas situation is itself unique. The central gas facility on the North Slope is (indiscernible--static) unique in this country and it's not surprising that a unique facility gives rise to unique questions. It would be surprising if it were otherwise. Third, on the prior administrative policy, Mr. Sullivan and Mr. Wessells both said, `Well, there really was no policy until 1989. It was just chaos and discord and no real agreement.' In making those points, they confused the Division of Oil and Gas Audit with the Department of Revenue as a department. The division had a policy, a longstanding policy which was that amendments were proper. That's why it issued the amendments. It's conduct speaks for itself. That's why there was a 1984 Attorney General's Opinion that said amendments are proper. However, it took until 1989 for that issue to get to a formal hearing where a formal hearing officer speaking for the department as opposed to just the division, could say, `we've heard the evidence, we've considered the arguments and this is the formal departmental policy.' It doesn't mean that there wasn't a division level policy prior. There was. It just took until 1989 for there to be a formal departmental decision. And once signed onto by the commissioner, that formal decision became the articulation of the department as a whole's, policy. And that didn't happen until the spring of 1989. On records, Mr. Sullivan said, `Well you know, if we get an assessment that's narrowly drawn and speaks to charitable deductions, we may throw our records that deal with income earned that year. I know something about Exxon's record retention policies. I know because in other litigation with that company, and this is all a matter of public record, they've threatened to send me to a salt dome in Leavenworth, Kansas, that serves as their record retention facility. And fortunately, I've been able to avoid that. But they have a very detailed record retention policy and for key or vital documents, they're retained and that shouldn't surprise us. Second, Mr. Sullivan's premise that the initial assessments were very narrow was wrong. The assessments talked about downstream value and transportation costs. And the whole tax year was in dispute. If you had a tax year in dispute with general issues, would you throw your reference away? Now the timing. There's been a suggestion that the department controls the timing and I touched on this earlier. It does not. The taxpayer asks for an informal -- the informal process has to work its course. Then there's the formal. And that has to work its course. And the department doesn't have the authority to goose the process along. It's a consensual process. The policy of the statute of limitations was suggested that the policy is closure. And it is -- closure in this sense. If you're going to sue someone, you've got a limited amount of time to do it. Statutes of limitations don't speak to a different question, which is, once you've sued someone, can you amend your complaint or can you amend an assessment. That's not even a statute of limitations question. It's an amendment relation back question. You're already in dispute. And so the closure contemplated by the statute of limitations is the closure before a case starts, not how long it takes once it starts -- a critical, critical distinction here. There were questions and points about new information. And the, perhaps, not so subtle message communicated by Mr. Sullivan and Mr. Wessells was that, `Well gee, the department's -- the division's theories just keep on changing. There's really no new information. You know, they get new ideas or they read a lot differently all of a sudden.' Well that's not entirely right and to cite one example, in giving no taxpayer-specific information, one of the big issues in all of these cases involves whether these taxpayers got revenue above the federal ceiling price in 1979-1980. It took the division some time to learn that they had perceived revenue over ceiling price and only when they understood that, did they realize that there was an issue there. When they understood that there was actually revenue over ceiling price, suddenly the question came, `Well, do we share in that or are we precluded under the laws?' And so, often it's the combination of new factual information as it affects the laws and the interpretation of the laws. It's not a situation where the department sits around and says, `Well, gee, this sounds like a good new theory. Let's try this today.' And to the extent that that impression was communicated, that's really not an accurate depiction of the process. And a final point there, the department is always playing catch-up. These oil companies are in the business. They know what their business is like, they know what the oil is worth, they know what they sell it for, they know what it costs them to get it to market. The division doesn't know that. It doesn't know where the stuff goes, or which boats were used or how much it costs to build the boats until it gets all the information and figures it out. The oil producers have an enormous head start. And three years isn't enough time to figure it all out and come up with a final number. Yet under the taxpayer's interpretation, that's the division's obligation -- at risk of not getting the correct tax. Thank you for your indulgence, Mr. Chairman, I do appreciate it." CHAIRMAN VEZEY: "Thank you. Do you have time for more questions or do you need to leave?" MR. HOSIE: "Certainly, by all means." CHAIRMAN VEZEY: "Representative Bunde." Number 199 REPRESENTATIVE BUNDE: "Just a very quick one and it's probably going a bit astray here but I was struck by the stress on urgency and there was a considerable amount of stress on urgency, and I would just ask Mr. Hosie if, in his opinion, if there is this urgency, would you consider it advisable that then the state breaks off negotiations with the taxpayers involved?" CHAIRMAN VEZEY: "Representative Bunde, I think you missed some of the testimony earlier, but I'm not sure which negotiations you're talking about but we do not want to go into the settlement negotiations that we all have knowledge were going on indirectly. That is a matter for the courts to deal with and not the legislature. If you're talking about negotiations for constructing legislation, that's perfectly legitimate discussion." REPRESENTATIVE BUNDE: "I withdraw the question." CHAIRMAN VEZEY: "Thank you, sir. Gary Davis - Representative Gary Davis." Number 219 REPRESENTATIVE G. DAVIS: "Thank you, Mr. Chairman. I believe Exxon gave testimony that the state issued them an amended assessment a day before a process was to take place. Were you familiar with that, and what's the rebuttal to that?" MR. HOSIE: "I am, Mr. Chairman. Any change in the prior assessment, the taxpayers call an amendment. But often, the change simply involves the clarification of the underlying data. And a number of the changes have been, for instance, through the royalty case, the state developed a computer barrel-tracking system, for want of a better term, that allowed the state to know where each and every barrel went. And as that process was completed, that information was then used in the various amendments. But there were amendments that were late in the process and Exxon complained and the hearing officer heard those complaints. But it's not a statute of limitations problem. If, for example a change comes in the middle of an administrative process, the taxpayer goes to the hearing officer and says, `Unfair. We were sand-bagged, we want more time to respond.' And that happens all the time on both sides, both in the administrative process and the court process. But to clarify that a little more, it's not a statute of limitations problem. It's a conduct of the process problem, and they're really different." Number 227 REPRESENTATIVE G. DAVIS: "Mr. Chairman, and that's true and I think that's what we're hearing here because we're hearing two sides and we're trying to decide who is being the bad ass and who isn't." MR. HOSIE: "Mr. Chairman, that is exactly right. It's really a characterization problem. They say it's a statute of limitations and if you're going to do it, you've got to do it all in three years, and we say no, you just have to start within three years. And then the process has its own protections and guidelines. And I think the state's right." REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. In your closing statement of the few statements you wanted to make before questions, you said that the oil companies know where their oil is going and how much it costs and what the value is, and that's a tremendous step up. When is that information, in fact, given? Don't they file monthly reports and information to the state?" MR. HOSIE: "Mr. Chairman, good question. And I should have talked about that myself. The monthly filings for both royalty and tax are extremely abbreviated. They don't tell you, they tell you, generally, for most of the time, for most of the taxpayers, which downstream market regions the oil went to. For example, 32 million barrels went to the Gulf Coast. It doesn't tell you where in the Gulf Coast or how they got there or what they did with them once they got there. That's all information that the defendants maintain in their accounting and controllers departments. And so the state, through the tax filings and the royalty filings, doesn't get even the tip of the iceberg. Not at all. It has to get that information through formal process. Through the auditing process or through requests for discovery in the royalty or through the formal hearing process where the hearing officer is empowered by statute to call witnesses and subpoena documents and figure out what actually happened. So we're always reinventing the world, but we're always trying to figure it out after the fact and it's a process of where the state has to go to them and say, `Please give us your documents that will allow us to know where you took the oil and what you did with it and how much you got when you sold it.' It's a little bit like an Easter egg hunt. It's a slow process. And I know because I was involved in the Annis (Ph) Royalty case and spent several years of my life doing that; trying to figure out, from the company's documents what happened, where the oil went, how they got it there, what they sold it for. If they exchanged it away, what they actually received? Those are the kinds of questions that are just spread throughout these audit issues." CHAIRMAN VEZEY: "Representative Gr -- Porter, I'm sorry." REPRESENTATIVE PORTER: "Thank you, Mr. Chairman. None of the scenarios, in terms of if this proposed statute passes, or doesn't, or if the Supreme Court case that is in existence now is settled in the side of the state or the taxpayer -- none of that precludes continuation regeneration in continuation of negotiations over these claims." MR. HOSIE: "Mr. Chairman, I'm not comfortable speaking to the settlement negotiations, but you know it's the attorney general's office call and I'm not privy to those policy decisions, if I understood the question correctly. And so, that would be a policy call of how to handle the settlement negotiations that I think is properly made by the Department of Law, given the separation of powers doctrine. And I'm just a foot soldier in that battle." MR. BOTELHO: "Mr. Chairman, I am available to answer the questions..." REPRESENTATIVE PORTER: "I don't wish to delay Mr. Hosie's plane so..." CHAIRMAN VEZEY: "We're not going to conclude the hearings here before lunch. Representative Hudson, do you have a question of Mr. Hosie?" Number 311 REPRESENTATIVE HUDSON: "Yes, Mr. Hosie, because I know you're leaving here, could and should the legislature consider modifying the laws relating to the data that is received. This whole tracking case Easter egg hunt type of a thing, wouldn't that be a constructive thing that the legislature could do to require this amplified data?" MR. HOSIE: "Mr. Chairman, yes. I'm not sure it's a matter that the legislature needs to do, but certainly the Department of Natural Resources and the Department of Revenue might want to consider passing regulations that say, `Please share with us, on an ongoing basis, your information that relates to the disposition of this crude oil in which the state has such a pressing interest.' I think it's a very good idea." REPRESENTATIVE HUDSON: "Thank you." CHAIRMAN VEZEY: "Does that concluded the questions? In that case, we'll stand at ease until -- it's ten minutes after twelve. We'll come back at 1:45." MR. HOSIE: "Mr. Chairman and the members, let me thank you and apologize for leaving. I'm leaving only because I have to get certain graphics ready for the Supreme Court argument, and that's important. But I do apologize and I thank you for your indulgence." CHAIRMAN VEZEY: "I call the meeting to order at 1:48 p.m., May 14, 1994, House State Affairs Committee continuing its hearing on 377 with the Oil & Gas Committee and the Judiciary Committee and Commissioner Rexwinkel is continuing his testimony. Do you have some statements you want to make to us, Commissioner?" COMMISSIONER REXWINKEL: "Yes, Mr. Chairman, for the record I am Darrel Rexwinkel, Commissioner, Department of Revenue, and if I may, Dick Brewer, Assistant Director for the Oil and Gas Audit Division, I'd like you to join me at the table." CHAIRMAN VEZEY: "Please. State your name." RICHARD BREWER: "Richard D. Brewer is my name and I am an Assistant Director with the Oil & Gas Audit Division in Anchorage." COMMISSIONER REXWINKEL: "Mr. Brewer has been there since 1985 and he has significant history with the division and prior to that, he was -- he is a CPA, he was with a national accounting firm prior to joining the Oil and Gas Audit Division. Mr. Chairman, quite a few things I would like to say. We did go over these charts but I'm not sure everybody went over them. If you'd like, we'll go back over them or if you think everyone has a good understanding we'll just ..." CHAIRMAN VEZEY: "You have to understand that there are seven new committee people at this meeting -- eight new committee people at this meeting; this is a joint committee meeting. So it would be repetitious for those on the State Affairs Committee but for Oil and Gas and the Judiciary Committee, it would be new." Number 353 COMMISSIONER REXWINKEL: "It seems like there has been a lot of questions with respect to, perhaps, some of the complexities in the past and maybe why the five-year statute that's been proposed in the legislation would be suitable for the future, and I think this (indiscernible--static) good vehicle to discuss that with and I think here Mr. Brewer can talk a lot about where the division has been and where it expects to be and with knowledge of the audit functions and the taxpayers. And as new members come in, we'll provide them with copies also. "This document, the first page is headed, `Department of Revenue's Appeals Process' and includes more than just... the first block up there says, `Taxpayer files the return' and that's the initial part. Normally the taxpayers will file their return on the due date, so for discussion purposes, we'll assume that the return is filed on the date due. Auditor reviews the return and it is either accepted as filed, and if so there is no further action, or the return is not accepted and the auditor issues an assessment. I believe the three year provision that we are looking at is the period of time between when the taxpayer files the return and when the auditor issues the assessment. And then we get into a new process. Once the assessment is issued, the taxpayer can either pay that assessment, and if they do not file a claim for refund, that's the end of the case at that point. The taxpayer may appeal the assessment. They have a couple of avenues, as have been discussed. The first avenue, well maybe not the first, but the usual avenue is to go to informal conference, to request an informal conference. After that process is concluded and an informal conference decision is issued by the division, a taxpayer may appeal that to formal hearing. Or, as indicated on there, the taxpayer can elect to bypass the informal conference process and go directly to formal hearing. The taxpayer may further appeal the formal hearing through the Alaska Superior Court and it can go on to the Supreme Court and, in some cases, the U.S. Supreme Court. And probably a block below that is collection. At some point in time collection is going to take place and perhaps the six years might be looked at, depending on how one views the process, but from the time the assessment is issued until after all this other process is concluded, and as we've discussed, we believe that the statute on the six-year collection tolls once the taxpayer appeals the assessment because it's next to impossible to make it through all these other blocks prior to six years being completed. There's a lot of steps that have to go through and a very long and a rigorous process. "The second page talks about the review, protest and assessment process. This is where there is meetings with the taxpayer to obtain additional information, meet with the taxpayer to review information and have arguments, and this whole process can repeat itself and that's why there's a circle drawn around it. And then at some point there's a final conference with the informal conference decision being issued. And Dick, if you would, you could talk about the process in the past and how this has taken so long and why we believe that five years would be suitable for the future." MR. BREWER: "Okay. Why can we do in five years what we haven't been able to do in three years? People ask me that quite a bit here, of late. 1994 is not 1978, it's not 1980. The Shah of Iran is not being deposed, he is not being deported from a country. You don't have the Iran-Iraq war ongoing. You don't have the windfall profits taxes, you don't have price controls, you don't have rates of de- control, you don't have entitlements, you don't have over charges issues -- 1994 is a whole new world. "(Indiscernible) first started flowing in Prudhoe Bay, there was a heck of a learning curve, as far as we were concerned. We were up against the largest and the most sophisticated taxpayers in the world. They knew the business, I mean this was their business. The oil business was their business. We had a heck of a learning curve. We didn't even know what to ask for. And we have to ask the right questions in order to get the right documents. We didn't know what to ask. If we did ask the right questions, and you got the right document, you had to analyze the document and figure out what the document said; what was most telling about the document? So it has taken us, and I know you've heard this time and time again, it has taken us a tremendous amount of time to get a handle on the oil business. I go on the road quite a bit with auditors and just recently, about a couple of years ago we were at an auditor's -- at a taxpayer's, and one of the taxpayers actually asked the auditor a question about the taxpayer's business. And it just shows you that over the years we've come to know, in some instances, more about the taxpayer's business than the taxpayer themselves. There's just a heck of a learning curve and it's taken us while to get a handle on what's actually going on. So, can we do in five what we haven't been able to do in three? Yes we can. Things have changed. The world is different today than it was fourteen years ago." CHAIRMAN VEZEY: "Representative Green." REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. You've given us several reason why, in the 80s it would have been difficult and I would say probably, from what you've said that five years would have been difficult then. If you have this all behind you now, does that mean that perhaps three years would stay as it is and be adequate?" MR. BREWER: "Three years is pretty close, it's pretty close -- right now, 94, we are issuing audits through 90 and 91. We are that close to the three-year provision right now. Could we do it in three? Possibly. But five is certainly more adequate." Number 450 CHAIRMAN VEZEY: "Representative Kott." REPRESENTATIVE PETE KOTT: "Thank you, Mr. Chairman. If, in fact all those other variables come into play as far as how long it takes for an audit to take place for the first three years an assessment to be made. Can you comment either, commissioner yourself as to perhaps why, originally back in 1977 we only had one auditor, auditor and the next year we only had three? And today we have, I think twenty-two? It seems like we're way behind the power curve and I think there was a letter of transmittal or a letter sent by the attorney general that said we're playing catch-up and is that the reason why we're playing catch-up, is perhaps we were ill-prepared back in the late 1970s, early 1980s." Number 461 MR. BREWER: "I don't deny that in that early time frame we had a -- kind of had a real good handle on what we were up against. We had price controls ongoing. Taxpayers will represent to you that, `Hey look, they couldn't sell that oil or that gas, that oil for any more than was the price ceiling at the time.' And, I mean, it sounded good to us. I mean that makes sense. In some instances though, as time went on, as more documents were submitted, and we examined more data we found out that was not always the case -- that price controls, in some instances, did not represent a bar to a taxpayer realizing more than was the ceiling price. There's a case like that very similar, ongoing right now in the appeals system. It's back at the Alaska Supreme Court. It has to do with ARCO and it involves entitlements. And it came from that period, that 79-80 period. There was just a lot going on, there was more than meets the eye and I agree. I think that we were a little naive at the onset." Number 475 COMMISSIONER REXWINKEL: "If I may, Mr. Chairman, you know some people have talked about the adequacy of the audit function and perhaps that the department or division, at least, has gotten all the money that the department has requested for it. Well I have been here now a couple of years and we've had problems with revenue shortfalls and so the first order of business is to sell the department's budget to the governor's office. The governor has been very supportive, but yet there has been a lot of competing demands. So it is always a selling process. But just to go back and review history a little bit. And we went back as far as 1985. In 1985, the governor's request was cut by the legislature. In 1986, the governor's request was cut by the legislature. In 1987, it was cut. In 1988, it was cut. In 1989, it was cut. In 1990, it was cut. In 1991, it was increased a little bit. 1992, it was increased substantially and that was at the work that we did in order to try to get more money in our budget. I remember those two budget periods. In 1993, we were again cut. In 1994, we were cut. And 1995, initially we were looking at a $670 thousand reduction in the concluding hours, I believe, that was reduced to a reduction in program receipt areas which will either hit the Charitable Gaming Division or a certain function in the Income and Excise Audit Division for Unclaimed Property. Those are the two program key areas we have there. So, the budget has taken reductions in almost every year, beginning with 1985. I'm not sure what happened beyond that because I didn't start looking before that. So it has been a period of time, very difficult to get necessary (indiscernible.)" CHAIRMAN VEZEY: "Thank you. Representative Ulmer. Representative Kott is next." Number 498 REPRESENTATIVE ULMER: "Just on that point, if I might, very briefly. Could we receive a copy of that Mr. Commissioner because we have had a number of people testify that every auditor that was asked for by the department the legislature funded and I would just appreciate it ..." COMMISSIONER REXWINKEL: "Well, if I could just respond to that before you get this, if you look at this, you'll see the same number of positions, almost the same number of positions. But is what happens, you know, the vacancy factor, you know we are looking at what a seven point something percent vacancy factor for this year if the budget (indiscernible) to help take care of the vacancy factor. So even the position count on here may show the same, that doesn't mean that we have the funds to fill all those positions." Number 502 CHAIRMAN VEZEY: "Representative Kott." REPRESENTATIVE KOTT: "Thank you, Mr. Chairman. I just wanted to bring it out because I think it's reasonable to conclude, at least for a period of time, that the state really lacks or lacked the sufficient resources to discharge this auditing and appeals duties. Clearly, I think that's one of the big problems that we have today and that's part of the reason why we're here today. (Indiscernible) old inherited problems is not something that we inherited in the 18th Legislature, it goes well back before us. Thank you, Mr. Chairman" CHAIRMAN VEZEY: "Thank you. Representative Gary Davis." Number 515 REPRESENTATIVE G. DAVIS: "Thank you, Mr. Chairman. I'm not so sure if I agree exactly with Representative Kott who says that we lack the resources. If that means number of people, I'm not so sure that's correct. He indicated that there was a learning curve, maybe he didn't even know how many people we needed to properly compute an assessment. But the learning curve and the indication that we didn't know what questions to ask in that situation -- did that -- what effect did that have on the actual assessment as far as being accurate for those years? I mean, being in a learning curve and not being completely informed, apparently, of exactly what to look for and what to indicate or what to include in an assessment would seem to have an impact on how accurate that assessment was. So exactly, were you feeling comfortable with that assessment? Or were there times when you submitted an assessment and said, `Yikes. You know, we better be ready for, get blown out of the water on this one.'" MR. BREWER: "I understand what you're saying. There was just a lot going on in the early 80s and the late 70s. I think that's why we're here today is because the initial assessments, although they were timely, were not exactly what they should have been or as accurate as they might be. Because of that, you have amendments. And the amendments primarily are to the returns that were filed in the late 70s and early 80s. Therein lies the problem. 87, 88, 89 -- will there be amendments? There might be amendments but they're going to be very few and they're going to be inconsequential, I believe. The major amendments came about because of the early 1980s and late 1970s, again, not having a good handle on what actually was going on in the marketplace. Doing the best you can with what you have, making sure that the assessments were timely, and then following up with a long-established division policy whereby, if necessary, would amend the initial assessments." Number 547 COMMISSIONER REXWINKEL: "And Mr. Chairman, if I may, the House introduced House Bill, I think it was 547, and in that bill it called for retroactive application using your royalty values to determine the value to be used for severance tax purposes. We issued a fiscal note on that bill and, if we include both the tax types we're talking about here, the 43.55 production tax and 43.21 separate accounting, the total effects of that going back into history would have been, retroactive to 1986, would have been about $3.5 billion reduction in the amount of outstanding claims including interest that we have. That backs up Mr. Brewer's statement that most of these assessments and claims go back into that earlier time frame when we had some very difficult periods with respect to value. So that's where the lions share of those claims rest is back in those earlier years." Number 565 CHAIRMAN VEZEY: "Representative Jerry Sanders." REPRESENTATIVE SANDERS: "Thank you Mr. Chairman. Commissioner, this has got a big, long history and I still have problems understanding how this revelation came about in January of 1994. If this problem goes back that far and all these years we've talked about... Why couldn't this have been fixed in 92 or 90 or 88 or sometime when someone else could have had all this fun." COMMISSIONER REXWINKEL: "Mr. Chairman, as I believe someone indicated yesterday, or stated yesterday, they were not here or they don't know why it wasn't fixed, but I can tell you there has been a process involved and that process resulted in a decision that was reached in 1989. As the taxpayers indicated they thought that was the first time that the department had ever taken a position with respect to the statute of limitations. You know one taxpayer characterized it as the department `flip-flopping' on that decision over that long-standing interpretation. Well there has been no flip-flop. As was indicated earlier by Mr. Hosie, the department itself, had to take this to a formal procedure prior to making the final determination. The division has had a long-standing interpretation, and it was also referenced to the Mary Nordale letter that said the department has no position. Well, that was in response to litigation (indiscernible) Standard Production Company saying that it hadn't gone through the administrative procedure process yet and BP, you need to take it through the administrative procedure process. And the court agreed with that position. So, yes, things need to arise through an administrative procedures process before the department itself can have a formal opinion. That was in 1989. Why somebody didn't look at this and say something different earlier -- well, someone did before 1984 -- SB 185, addressing the situation, was introduced in the Senate, I believe April 7, 1993. So it was introduced last year and there was little action on that last year and there was no action starting this year. So eventually we thought it was very important that this legislation get passed. "There has been a lot of, I guess, questions about this whole thing, but I mean if we go back to statute -- let's go back to statute -- it says here `Taxpayers Remedies in Section 43.05.240. A person aggrieved by the action of the department in fixing the amount of tax or imposing a penalty may apply to the department in sixty days giving notice of the grievance and requesting an informal conference. At the conference the person aggrieved may present arguments of evidence relevant to the amount of tax or penalty due the state. If the department determines that a correction is warranted, the department shall make the correction. A person aggrieved by the action of the department in fixing the amount of a tax or imposing a penalty may apply to the department and request a formal hearing.' And that's in place of the informal conference or thirty days after decision resulting from the informal conference. And then it goes on to say `At the formal hearing the department may subpoena witnesses and may administer oaths and make inquiries necessary to determine the amount of the tax or penalty due the state.' The amount of tax due the state of Alaska... That's the charge of the hearing officer through the commissioner of Revenue to determine the amount of tax due the state. If the person aggrieved does not care for that, they can always appeal that decision also. "And then we come into the three-year statute. Someone says `well yes but now that's aside, we can only reduce the amount of tax. We're going to bar the department from trying to determine the correct amount of tax because of the three-year statute,' and that's exactly what we're trying to clarify - how does a three-year statute reconcile itself with the statute in 43.05.240 that states that the department is to determine the correct amount of tax during the formal hearing process. And that's what we're requesting clarification of, is for the department to make a determination to the proper amount of tax (indiscernible) to obtaining and subpoenaing witnesses, administering oaths and obtaining necessary information upon which to do that, and the only time we get to do that is at formal hearing. And the informal conference process is to allow the taxpayer an opportunity to present additional information and the department to gain additional information in order to try to, perhaps, avoid a formal hearing process which is like a trial which consumes a lot of time and energy and perhaps it can be resolutioned during that process. And the three-year statute was basically a statute that says, `Okay, let's get the audit done within three years so we can move on to this administrative process of informal conference and formal hearing.' And this bill 377, I believe, is to clarify that we do have this provision to determine the correct amount of tax, and we also have a provision that says let's get the initial assessment out, get the initial audit done in three years so we can move on into this process of determining the correct amount of tax. But that is certainly not how it's being interpreted by a few taxpayers and that's the reason for the clarification." CHAIRMAN VEZEY: "Thank you. Does that conclude your question Representative Sanders?" REPRESENTATIVE SANDERS: "Yes, I hope so." CHAIRMAN VEZEY: "Representative James." REPRESENTATIVE JAMES: "Thank you, Mr. Chairman. I've heard from you that it was difficult to get up to speed on all the things that's happening with the oil industry and I think that I would kind of agree that that is a new business for us and that maybe we wouldn't be prepared for that, but it would seem to me like that the statute that was on the books that said three years from the time that the tax return is filed until the assessment needed to be assessed, that it would be very quickly to determine that that wasn't enough time. Was there any time in those early years that anyone asked for an extension of our existing statutes. Because if three years wasn't enough and you had to consistently be asking and I am assuming that I am correct in reading that that you have asked for a lot of extensions over the three year period, that you might have concluded that three years wasn't enough and that maybe we ought to change the statute." MR. BREWER: "I understand what you're saying and, you know, it's interesting that the extension of the statute actually goes both ways. People get the impression that it's the Department of Revenue who is always asking the taxpayer to extend because the department wants it. You know in many instances it's the taxpayer who requests or implies that they would appreciate it if the department would give them a consent, and the reason is because taxpayers have to comply with requests from auditors. Sometimes they are quite voluminous and they take a lot of time. Some of the taxpayers, in some instances, will not be able to do their share of the work, i.e. produce documents, produce records, or whatever and do it in a timely manner. So in many instances, I mean it was -- the extension of the statute the time to make an assessment -- it benefited both parties. It benefited Revenue and it benefited the taxpayer. It was almost an implied understanding that extensions benefited both parties." REPRESENTATIVE JAMES: "Thank you, Mr. Chairman, but on that point is, if you consistently have to get an extension of time to do the job, wouldn't it have been some indication to you that you needed more time in the statute so that you don't have to do that. I mean wouldn't it be the rule that the statute ought to fit the case as opposed to having to continually extend." MR. BREWER: "Well, you know, Exxon got up here and told you that they've extended the statute like thirty-three times and BP said the same or a similar number. The problem is, is that once in awhile the taxpayer says `no, I won't do it' and that has only come about, oh I don't know, probably in the past four or five years taxpayers have expressed frustration with the department not being able to get an assessment on a timely basis, and only recently have some said `no.' And I think that's the reason why we're here is because there isn't that interplay or that colloquium anymore between the taxpayer and the department." REPRESENTATIVE JAMES: "And then what would be your response if they said `no.' What would you do next?" MR. BREWER: "I think we would do what you would do, and we do do it. Number one, we have to determine the correct amount of tax. Number two, they're now going to extend the statute so we do what we believe is our job which is to protect the interest of the people of the state of Alaska, which is to say that we issue an assessment based upon the best information that we have at the time." REPRESENTATIVE JAMES: "You don't do a jeopardy assessment because you're not finished. Are you filing an assessment that's lower than you think it might be just because that's all the information you have at that time?" MR. BREWER: "In that instance we would try to have some basis for the assessment. We might go to some third party or some other -- some press or some other indicator -- I mean we have to have a basis for what it is we do. People - - you hear this terminology of `blue sky.' That's really not the case, we try to have a basis for what it is we do. If we don't have enough time, then our role, our goal is to protect the interest of the people of the state of Alaska. We do that." Number 677 COMMISSIONER REXWINKEL: "If I may, Mr. Chairman, you know on these jeopardy assessments though Mr. Sullivan said, `well, the department could issue a jeopardy assessment or the division could and just deny all the deductions.' In many cases here, we're not talking about deductions, we're talking about the value, the sales price, the sales price of the product. In a case of a jeopardy assessment, if we just deny the deductions and the taxpayer has misreported income, that's fraud. So I mean that tolls the statute because you're dealing with under payment or under report of income, which I believe that fraud could probably be assessed in that case. So it's probably easily proven. Deductions, though, are somewhat subject to some perspective and review, and basically here we're not talking about a lot of reduction, oh, we have the net back provisions and some of that is pretty well set like the TAPS tariff, but basically it's valuation,m it's the sales price - the revenue - that's the key to the whole thing - the revenue. And the only way we could jeopardy assess that, is to somehow just tack on some amount of money in order to try to protect the state against all the issues out there but that wasn't the goal. The goal was, in the final analysis, by statute to determine the correct amount of tax after we've gone through the appeals process - to get the audit done and that gives us the starting place to begin the informal conference and/or the formal hearing process to determine the correct tax." Number 694 REPRESENTATIVE JAMES: "But, isn't it true that most of the problems that we have, have been in determining the value of the oil, and it's been testified here before that fraud has not ever been an issue. We just now brought that up, but fraud has never been an issue, so that it's never been claimed that fraud -- and fraud would toll the statute anyway -- and that's not been the issue. Is that correct?" COMMISSIONER REXWINKEL: "Fraud is always very difficult to prove. Fraud you have to have intent." Number 700 REPRESENTATIVE JAMES: "Just to go on with -- I've got a few questions written down here this time so I won't forget one. Is that if, in fact, that the problem that we are in today is a result of our not knowing what we were doing, and that we were ill-prepared to deal with an industry that we weren't familiar with and so there was a lot of learning that we had to do and maybe we didn't have enough people. That's not necessarily questioned at this time. But is that true then, that the industry has to suffer those consequences because we're not prepared..." TAPE 94-66, SIDE A Number 000 COMMISSIONER REXWINKEL: "...they were amending their own tax returns. And, you know, we can't talk about some things because, of course, they're confidential with respect to taxpayers, but, I mean, as a result of the information we gained from the Amerada Hess royalty settlement, we've even gained some new information with respect to certain aspects of a taxpayer's return, that resulted in the taxpayer's favor." REPRESENTATIVE JAMES: "But isn't it true that one of the reasons that they can't file, they -- in the past, anyway -- haven't been able to file their tax return with accurate information, that sometimes the sale price and so forth is out and extended past the prime of the tax returns due date? Isn't that one of the reasons why -- and currently they have to do a lot of amendments, because they don't have the information? And that part of this bill is to solve part of that problem, that's on the severance taxes, but we're still talking about income taxes mostly?" MR. BREWER: "As far as amendments are concerned, you're quite right. Many taxpayers as a matter of course, every month file amendments to returns that are filed the previous month. As far as transportation costs are concerned, many times the taxpayers themselves don't know, until about a year later, as to what the accurate amount should be as far as deductions are concerned when it comes to transportation. I mean, as a matter of course, they file amendments to tax returns. In one instance there is a taxpayer who has filed amendments six years after the returns have been filed. Again, the audit process has been ongoing, or the appeals process has been ongoing, but, that amount of time has lapsed between the time when they last filed a return and their latest amendment." Number 044 REPRESENTATIVE JAMES: "Okay, I guess one more question. I've heard all the testimony yesterday and today, and seems like even from both sides of the issue here, that the testimony that we're getting, and the questions that we're asking, has to do with a awful lot of whether or not we have a problem today, and what caused that problem, as opposed to what the issue I believe we should be dealing with today, is, does the statute say what it looks like it says on the face, or does it say, what the department's position has been? And shouldn't that be what we're basing our decision on? As opposed to whether you took a long time to have the audit? Whether the oil company asked for extensions, didn't ask for extensions? Of how much money is at stake? Isn't it really a philosophy problem that we have, as to whether or not we the legislature want to say yes, what you've been interpreting is, what we believe it to be, or not?" Number 063 COMMISSIONER REXWINKEL: "If I may answer that, Mr. Chairman. Representative James, that's what I referred to when I referred to statute here and we talked about at the formal hearing. The department may subpoena witnesses, may administer oaths, and make inquiries necessary to determine the amount of tax or penalty due the state. The person aggrieved may present arguments and evidence relevant to the amount of the tax or penalty due the state. And if the department determines that a correction is warranted, the department shall make the correction. So, the formal hearing process is where we get to the correct amount of tax. Now, was a three-year statute meant to preclude what is indicated here in the formal hearing process about determining the correct amount of tax after going through all the oaths and subpoenas and what have you? And how does a three-year statute interplay with that? I think what we're trying to do is clarify that the three-year statute talked about getting the initial assessment, getting the audit done, so we can move through this administrative process, so we can finally determine the amount of tax." Number 085 REPRESENTATIVE JAMES: "Okay. And I understand that the difference between the three-year statute and the six-year statute, because it looks to me like you're totalling both of them together in one package, and my question to you, then, and I stated it earlier today, what I believe, that the three-year statute is giving a period of time when an audit ought to be finished. And then the audit being finished, then the six-year statute clicks in, and says you have six years to resolve this or file a suit to collect. And so my question is, and your interpretation is, that, you just have to have the first assessment in within the three- year period and after that, because of the relationship back, you can continue to amend the assessment, until you're to the final resolution through the formal process or whatever, and you finally get a final assessment and then is when the six years starts clicking in. And I wanted to know, why do you need six years from the time the final assessment is made, and all administrative appeal is over, to get it into court? Because that's what the six years is for, is a period of being able to go to collection. And if you're not going to count any of that time you're making appeals decisions, and you started after that process, then why do you need six years there?" Number 111 COMMISSIONER REXWINKEL: "Mr. Chairman and Representative James. Number one, it just seems like if we take a look at the chart, six years from the time the assessment is issued to go through all these processes, is a very quick period of time, and one that would be very difficult to maintain if we had to go through all the processes. It just takes a very long period of time. And why six years at the end of this? Because the six years is a time period - and Mr. Hosie discussed the six-year collection statute, and if you like I could defer that to the Attorney General." REPRESENTATIVE JAMES: "You put your picture up here, and you have - we both have the same three-year period, from the tax filing to the assessment, but I stop my six-year period at Alaska Superior Court. You have yours all the way to the bottom. Are you saying that you think the six years is still tallying along as we're in court?" COMMISSIONER REXWINKEL: "I'll defer to the Attorney General on that, Representative James." REPRESENTATIVE JAMES: "Because I don't think so, I think once it's in court, the statute is tolled. That's all I'm saying." CHAIRMAN VEZEY: "Thank you, Representative James. Representative Kott." REPRESENTATIVE KOTT: "Thank you, Mr. Chairman. I guess I'll ask one of the questions I have here, to Mr. Brewer. I think it was either yesterday, or this morning, one of the members of the industry made a comment, that concerned me a little bit. I think the comment was along the lines that maybe alluded to the fact that assessments, as they are currently being conducted, are unusually or unreasonably high. Can you comment on that particular aspect? That may be one of the reasons why we're finding some delays built into the three-year provision of the statute." Number 141 MR. BREWER: "I don't, I was here this morning, and I didn't pick up on that. Certainly not now, not in the current processes that we're involved in. Prices are much more transparent. We have a very, very good handle on transportation costs, we know how exchanges work. We know a lot about taxpayers, the taxpayers' businesses. We know what documents to ask for. We know how to analyze transactions. We look at documents and we are able to see what the documents tell us. That our current assessments are high? I don't believe so. I think they are right on." Number 149 REPRESENTATIVE KOTT: "So you don't believe they are inflated at all?" MR. BREWER: "Not in the time frame, not in this current time frame, I do not believe." Number 159 REPRESENTATIVE KOTT: "I think we've heard from both of the members that represented the industry that there seems to be a little bit of controversy here, that whenever you came to them, or vice versa, and asked for an extension, written consent to extend the statute, they were more than willing. And you kind of alluded to the fact that perhaps in recent times they were not so willing. Can you further amplify that comment?" MR. BREWER: "In some instances they said no, we've had to issue an assessment based upon the information that we had at the time. In some instances they put caveats on extending the statutes, which is to say that we couldn't bring up specific new issues. Or we had to limit any new issues to specific parameters. It's just been a more, of more recent times, there's just been more inclination on their part to not be so willing to extend the statute of limitations. I don't know what their motivations are. I can speculate, but I'm not going to." REPRESENTATIVE KOTT: "In other words, you're saying then, it's not just a matter of, all you have to do is ask." MR. BREWER: "Not recently." REPRESENTATIVE KOTT: "And finally, Mr. Chairman. If I might ask the Commissioner, we've heard a lot of speculation and read the newspapers, that there's a lot of money at stake. And I think I've seen figures, $6 billion, $3 billion; personally I think it's extremely inflated. Can you comment, cutting to the chase, actually how much is at stake here?" Number 191 COMMISSIONER REXWINKEL: "Mr. Chairman and Representative Kott, there's been discussion about total claims, penalties, and interest outstanding that would be taxes, and penalties and interest of about $5.5 billion. It's hard to keep up with that number on a daily basis, because interest is accruing, and sometimes new audit assessments are issued. But out of the $5.5 billion, I believe around $4.6 billion represents production and separate accounting tax claims, taxes, penalties and interest. Out of that $4.6 billion, about $1.6 is tax; $.3 is penalty; and $2.7 is interest. We've discussed about $1 billion represents and is related to the three-year audit statute issue, and about $2 billion relates to the six-year statute. There's a lot of different numbers, but it depends on how they're sliced and cut up and presented." Number 209 REPRESENTATIVE KOTT: "So basically what I'm hearing is, on the three-year statute of limitations, we're talking about $1 billion that is essentially at risk. And that, I am certain, is based upon the state receiving 100 percent, which, I'm not sure if that's ever happened nor do I care to get into it, but, is that correct?" COMMISSIONER REXWINKEL: "That would be 100 percent of the amount of the claimed - the amount of the assessment. (Indiscernible) penalty and interest." CHAIRMAN VEZEY: "Thank you. Representative Davidson." Number 218 REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. Mr. Brewer, what was the year you started with the department, and how many commissioners have you seen come and go since that time?" MR. BREWER: "I began in 1985, specifically with Oil & Gas, and I've seen a lot of commissioners come and go..." Number 227 REPRESENTATIVE DAVIDSON: "Are you aware of how many - well, the question is, how many commissioners that you are aware of that have been with the department, as well as division heads, who have now - and I ask this because we are in fact, we established earlier, that the appeals process is a quasi- judicial process - and my question is, are you aware of how many commissioners - former commissioners past, or currently, how many of those individuals, including division heads, who now work for the industry?" MR. BREWER: "Could you repeat the last part of your question please?" REPRESENTATIVE DAVIDSON: "Or division heads - " MR. BREWER: "Had been part of the industry?" REPRESENTATIVE DAVIDSON: "Yes. Who have in the past or currently work for the industry?" MR. BREWER did not respond immediately. REPRESENTATIVE DAVIDSON: "We could get that information later, maybe. I don't want to delay - " CHAIRMAN VEZEY: "No, I don't really want to wait on, that's kind of extraneous to what we're here for." MR. BREWER: "I'm sorry, I..." REPRESENTATIVE DAVIDSON: "Okay. So, then you - another question I wanted to ask you was, you've been there long enough to understand the auditing process, certainly, and I was wondering if, in what advantages would accrue to the legislature if in fact we had someone attached, say, to Budget and Audit, to keep up regularly on these kinds of things. It seems one of the things that happened is that the legislature kind of got away from it. Couldn't we avoid that kind of thing if we had a full-time auditor, say, attached to Budget and Audit to keep us informed about these kind of things?" Number 261 MR. BREWER: "I think that in our settlement process, and our audit process, I think we should be responsive to the legislature. If we settle with a taxpayer I think we should be accountable for how we settle with the taxpayer. I think we should do it on an issue by issue basis. I think we should have a reasonable standard, and I think we should have a basis for how it is we come down on settlements. So. In the past that's happened. We have made reports - I'm not sure whether it's too late to get (indiscernible) a monitor (indiscernible), but certainly we've tried to anticipate that we are accountable for what it is we do. And we have a pretty good road map for how it is we got to where we did with the taxpayer (indiscernible.)" Number 280 REPRESENTATIVE DAVIDSON: "I have a final question, Mr. Chairman, if I may. You talked about the state now being able to - you're comfortable with dealing with the five-year issue. And I'd like to ask what you predicated that on, why you think we have enough to be able to deal with the issues now in a different way; and, the second part of that question is, what, if in fact we have done that, what have you anticipated as changes to the process? For example, what happens if we see price controls again? Would that affect how well we could complete these tasks in five years?" MR. BREWER: "What do we know today that we didn't know back then? We know a lot. The first thing you do when you're an auditor, and you want to go in to a taxpayer, I mean, you come up with an audit program, and you get an idea of what you're going to look for, and why it is you want what it is you're asking for, and what you're going to do with it once you get it; we just have a wealth of experience. We've had just a lot of sharing between us and the taxpayers. And we have a very good relationship with taxpayers. We really do. We're on a first-name basis. They know what we're up against, as do they. We're on different sides of the table, but we both appreciate where each other's coming from. We have, for the most part, an excellent rapport with taxpayers. We really do. Is five years adequate? With price controls coming back - we know a lot about price controls. But, again, I don't know what form price controls might take if they come back. I don't know what would happen if the West Coast surplus went away. I don't know. But it's my feeling now that five years is adequate. We can do the job, and we can get the assessment out, and we can be capped, within five years. Maybe seven would be better, obviously. But I think we can do it in five." REPRESENTATIVE DAVIDSON: "Mr. Chairman, I would ask you, then, is it your understanding then that if down the trail we find that five years is not adequate, we could come back and change that, is that correct? If some new developments occur that - " Number 315 CHAIRMAN VEZEY: "Getting a little extraneous, Representative Davidson. We can't commit future legislatures." REPRESENTATIVE DAVIDSON: "I understand that, but I was wondering about your own judgment (indiscernible.)" CHAIRMAN VEZEY: "Representative Davidson, it would be my personal opinion that if we had a good bench mark for measuring value of a commodity, that it would not be necessary. Representative Green." Number 320 REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. We have heard about a day and half's worth of testimony now about the problems that are associated with various statutes of limitations, the various degrees of difficulty it has been in the past to try and establish value and what's better now -you've indicated that you know what to ask, the taxpayer knows what you're going to ask, and so you're on a first- name basis, and -- I won't continue to debate the amount of time that that in itself should have shortened -- My question seems to be that, it's not the net back, as I understand Mr. Rexwinkel said, it's not the transportation cost, it's establishing the value. And if that's the case, would it be possible that either one of you might give us a word picture as to just what happens with a barrel of, I don't know, say the biggest producer - BP - has a barrel of oil, what it goes through and what you do to that barrel to establish value. And let's go to the Gulf Coast, that's the furthest away. Just so that we understand the problems that you keep telling us about." MR. BREWER: "Maybe Mr. Wessells would like to come up here and join me. For different taxpayers or different - ?" REPRESENTATIVE GREEN: "No, I'm saying we take a BP barrel." MR. BREWER: "Okay, a BP barrel. Well, BP can't really refine ANS, because it's a very sour crude. And BP's refineries are configured so that they run light sweet crude. And so, when BP has a barrel of ANS, which they can't utilize in their refinery, what are they going to do? Well, they're going to try to trade it away and get a lighter quality crude that they can use in their refinery. They might deliver that barrel of crude to a refiner on the West Coast, a barrel of ANS, and in return, that refiner of ANS on the West Coast might give to BP a barrel of West Texas Intermediate at some place on the Gulf Coast. Well, what are you going to do as far as valuation is concerned? Money may or may not change hands. Certainly a differential usually changes hands. But what are you going to do as far as valuing that barrel of ANS?" REPRESENTATIVE GREEN: "I'm not establishing a value. I'm asking you, what do you do in that scenario?" Number 359 MR. BREWER: "Well, we figure that the value of what you gave up is best indicated by what it is you received. So we would look at that barrel of WTI that they might have received and say, okay, what is the current market value of that barrel of WTI that they received in the Gulf Coast? We would attach to it a differential. Money may or may not change hands; usually it does in that type of a situation. And we would usually subtract the differentials from the value of the WTI that was received, and that would be the value of the ANS that was landed on the West Coast." Number 367 REPRESENTATIVE GREEN: "And so light barrels then would be treated in that same manner if there was another tanker full that went to the West Coast and was treated after West Texas Intermediate?" Number 370 MR. BREWER: "Or, BP could have, rather than deliver the ANS on the West Coast, they could have delivered the ANS on the Gulf Coast. How do they get to the Gulf Coast? Well, through the Panama Canal, possibly. Through pipelines across the United States, possibly. I mean, there's any number of ways that they could get that ANS to a purchaser and then receipt the WPI. There's just a myriad of different ways that that can happen." Number 376 REPRESENTATIVE GREEN: "Okay, and let me rephrase the question if I may, Mr. Chairman. They may put it on the West Coast and trade it; they may take it to the Gulf Coast. There are a myriad, you say, at least there are several, different ways that they might trade that oil out to get their refinery or refineries taken care of. That number would be a finite number. I mean, in other words, if there were replications of the West Coast, or replications of the Panama pipeline to lighter ships on the Gulf Coast, and so on, those would be handled in similar manners, I would presume? For the given year that you are talking about? And you know, and they know, what you're going to ask for about those barrels. And now, if that establishes a value for those various scenarios for tax purpose, or for royalty purpose, would you assign because of the market basket concept that we've heard about over the last day and a half, would you see that it would simplify things in your accounting if you could say that the barrel that reaches, for example, the one you just talked about, hitting the West Coast, being traded out for West Texas Intermediate, that barrel could have the same value for tax and for royalty? Okay, now you've got taxes applied to that, but as far as a number to start with?" Number 397 MR. BREWER: "Two concepts we're working with here. The first concept is full consideration, what did the taxpayer actually get for the barrel of ANS that is delivered to the West Coast? That's the first concept: What did he get? The second concept is, what is the value that is prevailing? What is the value of the ANS that is being given up on the West Coast? I mean, there's two very different concepts. The market basket would establish what is the prevailing value of ANS. (Indiscernible) to the West Coast, or to the Gulf Coast. We'd say, `hey, look this is the minimum standard to which you people must adhere.' You must come up at least to this standard which is called prevailing value, which is the market basket. A mix of different crudes, and they're all weighted differently. That's prevailing value, that's the market basket. That's concept number one. Concept number two is, what did you actually get for the crude, you see? Because in this instance, let's say that BP, we determine that BP actually got $20 for the crude. But let's also say that the prevailing value of crude was $19. We would say that we wished to share in that extra dollar that BP received. If you received it, then we wish to share in those proceeds. So there's two concepts. There's full consideration with BP, and there's also a prevailing value standard to which they must adhere." Number 417 REPRESENTATIVE GREEN: "In order to reduce your problem, though, would it not be better to establish that value, say, if it's $20 they actually got, that establishes even better than the market basket approach, the true value of the oil? That's what they got for it?" Number 421 MR. BREWER: "Well, the full consideration is going to be, for example, the exception. One of the big problems that we've had in the past, is establishing prevailing value. And how we've established prevailing value is by reference to all these ANS deals in a specific market. You know, we'd say that every month there were 50 ANS transactions on the West Coast. And we would look at a representative sample of those transactions and say, we think these three transactions best represent prevailing value of ANS. It's taken us a long time to build those databases. In fact, what we did is, in the ANS royalty litigation, we used a lot of the information that they recovered and assembled and put into databases. They listed all the contracts. They listed all the deals and specific markets and specific months. And we'd say, okay, based upon all these deals that were going on, we can either simple average them or the royalty people would weight average them, they'd say, this is the prevailing value in this market. It took a long time to establish prevailing value. In a lot of instances we'd begin an audit, and we wouldn't even know what prevailing value is, but we had to get out there fast, because the statute was about to expire. What the market basket concept does is, it gives us prevailing value quickly on a timely basis, so that when we walk up to a taxpayer to begin an audit, we know what prevailing value is. Taxpayers know, right off the bat, what the minimum standard is to which they must adhere. There is none of this coming back four or five or six or ten years later and saying, ah, we think prevailing value back in 1984 should have been X, based upon new information that has come to date. That's not anticipated in this bill. We would know prevailing value up front, and we would get to the gist of what prevailing value is by virtue of regulation. We would establish a basket, establish crudes, establish weightings, and that type of thing." Number 446 REPRESENTATIVE GREEN: "Okay, and again, this is in the question mode, if I may, Mr. Chairman. So I hear you, if I think I hear you correctly, that you get a ballpark figure with the prevailing value, but then you actually can determine the precise amount that they got for tax purposes, you actually can determine that later perhaps, but, at some time then, you're going to have a prevailing value of say, $19, but they actually sold it for $20, and you have that expertise, that you can determine that, within what, a month, or six months, or something?" MR. BREWER: "What we intend to do as far as prevailing value is concerned is, it is going to be on a quarterly type of a basis." COMMISSIONER REXWINKEL: "(Indiscernible) just resell it for consideration." MR. BREWER: "You're talking about full consideration?" REPRESENTATIVE GREEN: "You mentioned the word prevailing value that was the market basket approach to get an approximation but then you can come back and say, if they sold it for $20, the precise amount, then you want, the state wants, the tax on that extra dollar?" MR. BREWER: "That's right." REPRESENTATIVE GREEN: "Okay. My question then, still, is, that if that's the case, why can't that value once and for all - rather than establish a completely different market basket, and repeat this whole complex process for a royalty value - why not use the same value and apply whatever taxation you have to, but, in other words, cut your job way, way down by establishing a method to determine a value, and if it needs to be adjusted, adjust a value. But not two different values." MR. BREWER: "So, is it that you're saying that in reference to prevailing value, we should use the royalty methodology?" REPRESENTATIVE GREEN: "I'm just asking. I'm just wondering if that wouldn't be a way to simplify. We keep hearing that the reason you need five years, is, even though you've got a much more streamlined process, now, you need to extend the statute of limitations because, Oh, my stars, look at all the things that we have to do. And I'm saying, knock out a few of those stars." MR. BREWER: "It's a good question, and we hear it a lot. Should I go first, Darrel? The royalty people did a heck of a job. I mean, they had all the taxpayers together. There were eight or nine or ten taxpayers. In fact, the litigation is still ongoing. Valuation of gas, as far as royalty purposes is concerned, is still being litigated. Oil is pretty much over, although there were a number of taxpayers who were not parties to the royalty litigation. Why is royalty different than tax? I guess that's your question. As far as royalties are concerned, it's a contract type of an arrangement. You and I walk into the room, we sit on opposite sides of the table, I have no presumption, you have no presumption, we're equal parties. And we sit down. My impression of the royalty folks was that they wanted to be the fairest, the most reasonable, that they could. I mean, because they had equal standing. They had no deference afforded them. When they went in to a judge, or before a jury, it's a case of who has the best case, and who appears to be the most fair. That's the rules of - my impression of what contract negotiation is all about. As far as the tax law is concerned, that's not the case. You have a sovereign out there. You have a sovereign who is given deference. A sovereign who is given deference when they administer their statutes and regulations. The sovereign, when he administers those statutes and regulations, doesn't have to -- I mean, there may be two or three different avenues down which to go. The sovereign only has to be reasonable. I mean that's the only standard which he has. He is afforded deference. And if his basis for his decision is reasonable, then he wins. I mean that's the long and the short of it. To impose the royalty provisions on the tax side would essentially take away the deference that's afforded an agency who administers its regulations and statutes. "There's other reasons why royalty does not equal tax. If you look at the royalty provisions, the DL1 form, the lease form, there's a couple of paragraphs in there, paragraph 15 and paragraph 16, that talk about value. There's four or five sentences, total. And that's all it says about value in the lease form. As far as the tax side is concerned, we have statutes that are that thick, we have regulations that are that thick, we have a body of law, we have case law. I believe we have more of a road map as to where it is we want to go and what we want to do. In many respects, royalty settlements are based on something other than market value. Our goal, as far as tax is concerned, is, what's the value of the crude in the market place at the time? What's the market value of ANS when it's delivered to the West Coast or the Gulf Coast? I believe that's royalty's goal, too. However, a lot of times, there's other considerations in the royalty settlement. There might be political considerations. Again, there might be social considerations. There might be economic considerations. You read some of the royalty settlements in Cook Inlet, and it will say right in those settlements that paramount to reaching agreement between the lessee and the lessor, is the maintenance of 300 jobs in the Inlet. I mean, something along that line. So, there are different standards when you talk about a royalty settlement than there may be in a tax (indiscernible.) "Why doesn't our royalty equal tax? For example, in the early years, in 1979 and 1980, the state on the royalty side signed a producer intention agreement. And I've seen letters from the Speaker regarding this. The state, on the royalty side, decided to forego any, quote "value over ceiling" if in fact it was out there. And in return for that, taxpayers assumed that their crude, the ANS reached the ceiling price at a time earlier than they think it actually happened, but they actually paid ceiling price. And in return they got to keep the crude because crude was a very valuable commodity in the early 80s, and the late 70s. On the tax side, we don't believe we are so bound. Our role is to say, hey look, if you got it, if the price ceiling rules in effect at that time, did not act as a bar to you receiving greater than, and we can prove it, we can show you that you actually got that crude, the value in excess of ceiling, then we think that the people of the state of Alaska deserve a portion of your good fortune. I don't know. There's probably other reasons out there that royalty does not equal tax, but those are the ones that come to my mind right now." REPRESENTATIVE GREEN: "This is just a one-shot answer. Does the contract price fluctuate with relationship whether it's above or below the tax value? Or is tax value always higher?" MR. BREWER: "Are you asking me, have we compared ANS spot on the West Coast for 1992 versus the royalty settlement numbers?" REPRESENTATIVE GREEN: "No. The tax value that you apply to crude versus the agreed, the contract price you mentioned, as far as royalty is concerned on that crude." Number 547 MR. BREWER: "Could you please repeat that?" REPRESENTATIVE GREEN: "Okay. You say a contract price, you've got a contract agreement, that this is going to be the way that we figure the price, and you're willing to forego that that might not be exactly what they got for it. But in a tax value, you want the specific value that they got. And your example was 19, maybe, in one case, and 20 as far as what it was sold for. Does that flip-flop?" MR. BREWER: "I understand, I believe, what it is you're saying; which is to say, that if they receive less than prevailing value - is that what you're saying? - for example, if prevailing value is $19, and they don't receive $20, they actually receive $18, what would we do in that situation? The statute is quite clear. It says that, or, my reading of the statute is quite clear, I think the taxpayers might disagree. But the reading of the statute says, that in no event may the value of the crude be below prevailing value. Which is to say that under O20(f), prevailing value sets the floor. If the taxpayer receives less than prevailing value, they still have to report and pay based upon prevailing value. They are brought up to the minimum. If in fact they receive more than that, then it's our belief that we should approach that increment and get our fair share." Number 564 COMMISSIONER REXWINKEL: (Sound quality for Mr. Rexwinkel's is quite poor.) "But, if I may, I think there may be some confusion between the consideration, full consideration, or sales price and value. In the royalty side, I think is what some of you were saying, is that, on the royalty side there was a value method, a method of determining value that was reached, that could be used for tax purposes also, and that would be what we're talking about as prevailing value. (Loud mechanical noise from outside interrupts, some text indiscernible.) The royalty contract was a method, the agreement there, that was reached, was a method for determining value, for applying the royalty provisions. In the tax side we have this prevailing value feature and those are somewhat equal in today's consideration. But then there's also what we call full consideration. I think when we've heard a contract we have to be careful we're not referring to the royalty contract, because contractually we are referring to the sales price where BP could have a contract to exchange oil or just sell oil, or whatever the case may be. And then we have to look at the contractual sales price, so to speak, what the taxpayer got versus what the prevailing value was. And if the contractual amount was less than prevailing value, then we would, as Mr. Brewer said, want to share in the prevailing value, what they should have received, or what they could have received for the oil. Is that a fair way of saying it? On the other hand, if they received more than the prevailing value, then we'd like to take a part of that also. There's been a little degree of contention in that, because it's really what's called the higher of provision. But the prevailing value, and what we have in the proposed SB 377, is a method somewhat similar, on the same principles, as royalty, a method to arrive at prevailing value, without having to start looking at a lot of foreign oils and other considerations to arriving at a prevailing value amount, and one that we could, and the taxpayer could compute almost immediately. Now, some of the taxpayers do not have, really not burdened, shall we say, by the higher up provisions, because a lot of the oil is internally refined, if not all of their oil, is internally refined. And in that case, there is no sale, there is no consideration as prevailing value." CHAIRMAN VEZEY: "Thank you. Representative Brice." Number 596 REPRESENTATIVE BRICE: "Thank you, Mr. Chair. Question back to process. You'd made the statement, I believe the statement was made or implied, that extensions aren't automatic. That the state comes in, and asks for an extension. That doesn't necessarily happen. Or industry comes in and asks the state for an extension. That doesn't necessarily happen. Is that correct? How much notice needs to be given, say, at hearings scheduled for Wednesday afternoon at 3:00? How much notice must be given, say, by the industry to have that hearing put off? Is there any notice, necessary notice requirements?" Number 608 COMMISSIONER REXWINKEL: "Mr. Chairman, if I could - Representative Brice, I believe (indiscernible) the audit process, in which the auditor makes a request to go visit the taxpayer's place of business. That's one situation. But the taxpayer may say, no, we've got the IRS in, we've got other (indiscernible), we're going to be out, and there's a lot of different reasons why that may not be convenient for the taxpayer. So in that case we try to work out a mutually convenient time. And sometimes that results in an extension, a need for extension, because there is no mutually convenient time, for one reason or another. And once the audit is complete, and an informal conference or the assessment is issued, the taxpayer can appeal. At that point, they can request an informal conference or a formal hearing. During the informal conference process, there are meetings that are set up. We agree to meet with the taxpayer. The taxpayer agrees to meet with us. And that may be in Cleveland, Ohio; Seattle; Juneau, Alaska; Anchorage, Alaska; someplace, by mutual agreement, of course, or if one party just doesn't show up, there's no meeting that takes place. Whereas in the formal hearing setting, yes, I mean then there's a definite schedule, the schedule is set up, and then there is a request if a change is made, or ask for an extension. But it depends on what stage it's in." Number 624 REPRESENTATIVE BRICE: "Okay, I would probably - the scenario that was brought to my attention was, say, under a formal hearing. The state had requested extension, possibly, - at which point in time I would have thought that it would have been automatic, considering the state runs the formal hearing process. But, say, a situation arises - what happens, or, what's the latest the state can introduce an amendment, say, on an assessment. Assessment gets to formal hearing, it's all on appeal, everything else. The night before, or, for that matter, the week before the scheduled formal hearing, the state plops down a new amended assessment, 200 pages of documents, that kind of stuff. Is there any protocol to insure that doesn't happen? Or how that is handled?" Number 636 COMMISSIONER REXWINKEL: (Extremely poor sound quality.) "I believe that was brought up earlier this morning, and a taxpayer indicated that the day or the evening before the hearing was to take place, the division came in with an amended assessment, and the taxpayer requested an extension, and the apparently the department at that time said no, that's (indiscernible) the hearing process. And it's up to the commissioner, and the commissioner (indiscernible) determine whether extensions are going to be granted. In many cases they are, because the whole formal hearing process is to allow sufficient information and evidence to be entered into the record to make a final determination on the tax. But that's a long involved process, and it's hard to say where in that whole process this last amendment came about. (Indiscernible) in the beginning of the process, probably didn't make a great deal of difference, because there is a long time to go before the formal hearing would be concluded in this case (indiscernible) courtroom setting." CHAIRMAN VEZEY: "Thank you. Representative Porter." REPRESENTATIVE PORTER: "Thank you, Mr. Chairman. Setting aside for a moment the question of whether there is or isn't a three-year statute of limitations, the process that you've described, is one that is supposed to get at the best value. Not the best for the state, or the best for the taxpayer, but the most accurate, the most fair value of the oil. Is that...?" COMMISSIONER REXWINKEL: "Well, the prevailing value, yes. (Indisc. - another voice talks over.) Number 655 REPRESENTATIVE PORTER: "Well, okay, that's what I'm kind of questioning. If I understand your testimony, set on whatever standard, the new standard, or your current standard, of prevailing value of oil, if somehow the taxpayer finds a way to sell that barrel above, you want to share in that profit. But if he somehow doesn't get that break, and sells below, he doesn't share the loss with the state." Number 660 COMMISSIONER REXWINKEL: "Mr. Chairman, and Representative Porter, we're not talking about the corporate net income tax. The corporate net income tax is based on your net income, or net loss, as the case may be. Of course there's no tax under net loss. But, in an income tax setting, it's what you actually earned in your business, or lost in your business. Here, we're talking about the severance tax provisions of the statute. And I guess if a taxpayer desires to sell its oil for less than value, that's a taxpayer's business, but the state would like to get its severance tax based on the value of the oil at hand." Number 667 REPRESENTATIVE PORTER: "You don't think that selling it below value, assuming an arms-length transaction, is a better reflection of value than...?" Number 670 COMMISSIONER REXWINKEL: "Mr. Chairman, Representative Porter, sometimes it's kind of difficult to determine what the full consideration, or what the consideration is. I mean, there's a lot of different contractual relationships that are taking place within the industry, and we don't know if a straight transaction between A and B is the total transaction. I mean, B could have an agreement with C and C in turn could have an agreement with A, and unless you look at A, B, C and A and look at the whole circle, one may not know exactly what all the full consideration, or what all considerations may have taken place." Number 676 REPRESENTATIVE PORTER: "That was my other question. I think you just answered it. That is the reason why there is a prevailing value and an actual sales value, because you just don't feel that you can be confident that a pure arms- length transaction has occurred in every sale. Is that what I hear you saying?" Number 680 COMMISSIONER REXWINKEL: "And the other reason, really, Mr. Chairman, Representative Porter, is that the severance tax is not a net income tax. It's a tax on the value of the oil. (Indiscernible) one consideration that the statute says, or a consideration, whichever is higher. But the minimum, the bottom line, is the value of the oil. What was the prevailing value?" Number 685 REPRESENTATIVE PORTER: "And you'd have a concern that there are sales that wouldn't reflect the highest value that it should?" Number 686 COMMISSIONER REXWINKEL: "We would be concerned, for the state, if the state did not receive at least at minimum the prevailing value for the oil under the severance tax statutes. I guess that's..." Number 689 MR. BREWER: "May I? Our approach to determining what prevailing value is, getting to your question, my read on the situation? Very, very conservative. Because of the situation that you just brought up. The regulations are, some people say specific, and some say not, as far as we're concerned right now. But it says, look at three contracts in a market, during a month, whatever, three high volume contracts, not just a one time deal, look at something that's high volume of long term in duration, and pick three contracts, (indiscernible) three contracts, simple average those contracts, I mean, these are actual ANS deals on the market place, take a simple average of up to three, and that is prevailing value. In the back of our mind we've always been concerned that we want to make sure that while prevailing value gives to the people of the state of Alaska their fair due, we're also concerned that it be a conservative and a realistic number. And when you pick high-volume contracts -this is my experience - they're the nominal value. You're not picking the highs, you're not picking the lows. When you pick the high volume, the contracts that are substantial in duration, you're picking the contracts that are right about here in the middle. And so, we're very concerned when we do approach prevailing value because of the question that you raised." Number 705 REPRESENTATIVE PORTER: "Is this, basically, the philosophy that you would see in applying the provisions evaluation of..." TAPE 94-66, SIDE B Number 008 MR. BREWER: " - well, taxpayers, what we want to do, is, we want to address taxpayers' concerns in one instance. And one of their concerns has been that, as far as prevailing value is concerned, it's taken the department sometimes two, three, ten years, whatever, to come up with a final prevailing value. Because it is based upon, you know, analyzing contracts (indiscernible) full value as far as contracts are concerned. What we would do in this bill is, we would come up with a prevailing value on a very current basis. The goal is, as far as prevailing value is concerned, is to come as close to the market value of ANS as possible; i.e., if you have spot values of ANS on the West Coast, or spot values of ANS on the Gulf Coast, that's where we think we should be at. And that's our goal. That's where we want to be. And so, in the basket that we're proposing, there's going to be a preponderance of reliance on ANS. In both instances - again, we're going to do this by regulation, and we've been - our discussions have been ongoing with the taxpayers since April of 93. Well, we have been deliberating within the department, okay, as far as regulations are concerned since April of 93. We have been talking with the industry probably within the past four or five months. But in the basket we have a heavy reliance on ANS. For example, 50 percent. And then we have six other crudes that are all solid crudes that look a lot like ANS, which may or may not be domestic crudes, which may be foreign crudes, and they are all weighted currently about 10 percent. And we've been having discussions with the taxpayers about, what do they feel about the basket; the different weightings; the inclusions of the different crudes, and, again, the goal is, we want to get as close to the market value of ANS as possible. That's fair. And that's where we want to go." Number 041 REPRESENTATIVE PORTER: "This is the system that would be put into place under 377?" Number 042 MR. BREWER: "That's correct." REPRESENTATIVE PORTER: "Thank you, Mr. Chairman." CHAIRMAN VEZEY: "Representative Gary Davis." Number 043 REPRESENTATIVE DAVIS: "Thank you, Mr. Chairman. Mr. Brewer, what - when an extension is requested by either party, it must be, I understand it's just an informal letter, and in that letter it details what's needed by the department, say, if it's at the request of the department, like, haven't had time to properly analyze the paperwork and the documents, so in there you, well, maybe you can go over that. It's my understanding that it's quite, pretty much detailed as to what you still need to pursue to adequately assess. And if it is requested by the taxpayer, is it as detailed again. So where it seems to me that that could be, that's really a vital link here, as to problems. Of course, you have to have a working relationship, you have to understand that nobody's trying to hide anything, or nobody's trying to look for something that may not be there, or which - maybe if you would go over that process, and what might be included as far as the details in the extension requesting letter." Number 073 MR. BREWER: "I don't want to give you the impression that the taxpayer overtly or openly requests that we file an extension. It's kind of like an implied thing. They call up and say, hey, look, we're not really sure that we can comply with your requests in a timely fashion. And we know that not being able to do so, we might need to extend the period of time. And so, I mean, it's kind of a coming together. What does an extension look like? It's, you know, it's a piece of legal paper, and it just says that the taxpayer agrees to extend the period of time during which the Department of Revenue may file an assessment. And then it lists the tax periods that are covered. And these tax returns are filed on a monthly basis. So if you want to extend three years, let's say you're doing a three-year audit, and you want to extend it for one more year, you'd list every month that's of issue, and then you'll say that the period of time within which to file an assessment is extended for X amount of time. We would sign it, the taxpayer would sign it, and it's binding. As far as document requests are concerned, they're not a part of the extension per se. I mean, they're kind of, they're not part and parcel, I mean, you would get a request over here for documents, and then an extension would be wholly separate. The two would not be together." Number 105 REPRESENTATIVE DAVIS: "Mr. Chairman, if I might. The reason for asking is it seems like one of the key issues is, an amended assessment that increases the tax, you've found some additional information that says, oops, we missed this, and here is another $10 million that we can amend. It seems to me like in the letter you could detail or even let them know, say, that we don't have enough documentation here, in this area, whatever it might be. So, apparently I'm on the wrong track, because it isn't as detailed as I'm led to believe. In other words, when you get a letter indicating, hey, we need these documents because we want to check this out a little closer, that could click and say, that may, you know, indicate that an amended assessment later on might be increased, if they can prove this, and ratchet down, a little bit, exactly, where this barrel went or whatever. So apparently it's not as detailed as I'm..." MR. BREWER: "Mr. Chairman, Representative Davis, the extension of time within which to file an assessment has to do with the initial assessment. The three-year period is about to end. We can't make the assessment, we want you to extend the time within which we can file an assessment. That's for the initial filing. Amendments occur most often after the expiration of this time frame. You've made the initial assessment, you've been timely, later on, a year or two years, three years, down the road, you might be auditing another taxpayer. You might get a document that involves another taxpayer that you might have issued an assessment on a couple of years ago. It's that type of a process. So, amendments usually occur after the expiration of the three- year plus the time (indiscernible.)" CHAIRMAN VEZEY: "Did that conclude your questions?" Number 147 REPRESENTATIVE DAVIS: "I do have one - I think, Commissioner Rexwinkel might be able to answer this: Of the, we've gone back to the $1 billion, $2 billion again - the $1 billion based on the three years - if that, of the suspected $1 billion based on the three years, is a bulk of that protected by an agreed extension?" COMMISSIONER REXWINKEL: "No, those Mr. Chairman, those would be unprotected (indiscernible.)" CHAIRMAN VEZEY: "Representative Sanders." Number 158 REPRESENTATIVE SANDERS: "Thank you, Mr. Chairman. Commissioner, going back to the conversation between Representative Kott and yourself quite a while ago, there's a question that's always plagued me, and I've never been able to get a satisfactory answer. In order to better understand what's at stake here for the state, without getting into any of these secrets or any negotiations, or any individual taxpayers' problems, when you were talking about the figures of $5.5 million, $4.6 million, $3 million, $1.6 million, or billion, $1 billion, when I hear that someone settles for 50 cents on the dollar, or 10 cents on the dollar, or 15 cents, what dollar are we talking about at that point? Are we talking about the $5.5 billion figure? The $1 billion figure?" Number 177 COMMISSIONER REXWINKEL: "Mr. Chairman and Representative Sanders, well, conceivably it's kind of all related, shall we say. It's the $5.5 billion, are the total outstanding plain taxes, penalties and interest. And then we break it down into these other components. And, let's say if you referenced the settlement at 50 cents on the dollar, it would basically be 50 percent of those dollars that we talked about, and it would be kind of hard to say if the $1 billion is worth 60 cents, or 40 cents, or 100 cents on the dollar. I mean, it's in relation to the total amount. So in other words, if we had $5.5 billion, and somebody would say that we've settled for 50 cents on the dollar, I guess then you might try to say, okay, the state will eventually get then, 50 percent of the $5.5 billion. If you wanted to carry it along in that line of thinking." Number 197 CHAIRMAN VEZEY: "Thank you. It's 3:15. Why don't we take a break and come back at 3:30." CHAIRMAN VEZEY: "We'll call the meeting to order at 3:33. Continuing in our questions here, the next person on our list, Representative Sitton passed, Representative Davies." Number 204 REPRESENTATIVE DAVIES: "Thank you, Mr. Chair. I just had a couple of questions on the information sheet that you handed out." MR. BREWER: "Yes." REPRESENTATIVE DAVIES: "I guess I'll just - they're in no particular order, so I'll just go down, in row 2, which is the tax dollars collected, there was a substantial change between 82 and 83. Could you tell me what the reason for that was?" MR. BREWER: "Substantial change between 82 and 83. It went from, looks like $2,404,000,000. to $1,223,000,000. (AS) 43.21 was called separate accounting. It was in effect from 1978 through 1981. The legislature amended, or repealed 43.21 - there are a number of circumstances why that happened, but in order to replace that tax type, it was replaced by what is called modified apportionment, which was a different means of apportioning income to Alaska, if you were an oil and gas producer or a pipeline transporter. So, the difference, and I'm not sure how much, but certainly the drop there is because of the cessation of (AS) 43.21." REPRESENTATIVE DAVIES: "Thank you. And row 3, comparing the number of audits issued compared to the number of taxpayers in the time periods between 82 and 86, there seems to be uniformly more audits issued than taxpayers, but for 78 and 80 and 81, there are fewer. Does that mean that there are still audits for those years that remain to be issued?" MR. BREWER: "Mr. Chairman, Representative Davies, are you talking about line #3?" REPRESENTATIVE DAVIES: "Line #3, right. Comparing that to line number #1. I presume that there should be at least one audit per taxpayer. Is that a wrong assumption?" MR. BREWER: "In some respects, a tax type might not be audited. Are you saying that number 1, you have more taxpayers than the number of audits that were issued?" REPRESENTATIVE DAVIES: "For those early - yeah. Just looking at the middle years, where I presume that, you know from 82 to about 86, there are uniformly more audits than taxpayers. And then I notice just for those - for 81, 80 and 78, there are fewer audits than taxpayers. I'm just wondering what the reason for that is." UNIDENTIFIED SPEAKER: "If they just paid, there wouldn't be an audit." REPRESENTATIVE DAVIES: "No, there'd always be an audit, I think (indiscernible). Maybe they paid, and they liked it." UNIDENTIFIED SPEAKER: "You could have more than one audit." MR. BREWER: "I understand the discrepancy, and I'm not able to address that right now, but I'll certainly take a look at it, and I can get back to you." REPRESENTATIVE DAVIES: "Okay, thank you. And then, Mr. Chair, if I might, one further question on this. On row 4, the number of amended assessments. Would you just tell me what the definition of that means. Does that mean that - is this the number of assessments that have been amended, or the number of amendments to assessments that have been issued." MR. BREWER: "Mr. Chairman, Representative Davies, they are - you would issue an assessment within a specific time frame so they would not be time barred, and then these are amendments to those assessments." REPRESENTATIVE DAVIES: "So one assessment might be amended more than once?" MR. BREWER: "That's correct." REPRESENTATIVE DAVIES: "And that would be included in this number?" MR. BREWER: "That's correct." REPRESENTATIVE DAVIES: "Thank you." CHAIRMAN VEZEY: "Thank you. Representative Finkelstein." Number 275 REPRESENTATIVE FINKELSTEIN: "Thank you, Mr. Chairman. The one thing that came out earlier from the two companies that are taxpayers, in their testimony, is that somehow it's not fair, or improper, for the state to correct these taxes through amendments after three years. But there's a comment, you made earlier, in your testimony, which was that these companies themselves have come in and amended their tax returns at some point, but it wasn't clear in your testimony whether that was, in some of those cases, after the three year period. Are there situations where these companies, themselves, have come in to amend their tax returns after the three year periods with information, I assume, that's intended to lower their taxes." MR. BREWER: "Mr. Chairman, Representative Finkelstein, you're correct." REPRESENTATIVE FINKELSTEIN: "That has occurred. Okay. Thank you." CHAIRMAN VEZEY: "Thank you. Representative James." Number 288 REPRESENTATIVE JAMES: "On that point, Mr. Chairman, thank you. If they have come in, following up on Representative Davies' question, if they come in and want to make a change, what would be your position if they filed for a refund after, while I assume that your position was, that the statute hadn't run yet. If you're still doing assessments, you wouldn't mind if they filed an application for a refund of either something they have filed in this case or for some of the assessments." MR. BREWER: "Mr. Chairman, Representative James, if in fact they did file a claim for refund and if they were under audit, we would combine that claim for refund with our determination of what we believe the correct tax liability to be. And so, there would be a final assessment issued which would incorporate, or consider, take into account their claim for refund." REPRESENTATIVE JAMES: "The reason I'm asking that question, I guess, and maybe I didn't really ask it clearly enough in the first place is that, the way the - and you've made lots and lots of correlation between the way that you determine that this statute of limitation works is similar to Internal Service's statute of limitations. But I know that if you file an amended return after the due date of filing the return, if there was tax due, you must pay it, if you have a refund, you can't get it. And the same would be true if you amended - you filed a return and the time for the three-year statute on the filing a return passed on by, and you amended your return to owe some tax, you have to pay it. If you amend it for refund, you can't get it, because the statute of limitations has passed. And so I would assume that it would be the same in this case." MR. BREWER: "Mr. Chairman, Representative James, I think it depends upon what forum you're in, as far as the federal government is concerned. You're aware that if you pay the tax and file a claim for refund, then you'll find yourself in district court and you have the possibility of a jury trial. You're also probably aware that if you contest your liability, do not wish to pay the tax, appeal, you'll find yourself in Seattle in tax court. One of the consequences of appealing an assessment, not paying, and going to tax court, is that the tax court can determine your liability either up or down, and so, I would believe, I don't have a lot of (indiscernible) with what goes on in tax court, but I believe that you would be able - if you are due a - pay a lesser amount of tax and you're in a tax court forum, then I don't know why your refund claim or your lessening of the liability - I don't why that wouldn't be entertained. Because in tax court, the amounts can go down and they can also go up." REPRESENTATIVE JAMES: "Thank you. It doesn't work that way." CHAIRMAN VEZEY: "Thank you, but Representative James it really - we're getting out of the property tax area and into another area, so I don't want to spend a lot of time...Representative Davidson." Number 342 REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. Mr. Brewer on the calendar year basis document that you passed out, I look at number 3 and then I go down to number 7, and in each of these years I subtract the closed audits, for example, in 78, 32 from 35, that means there were three audits that were not closed, right? Then as we go along, starting in 1980 there are seven audits that were not closed and then you have for the next five years - or four years rather - you have five. Are these the same five audits, is it - do you understand my question? Are these ongoing audits and we finally got to 1991 and we still had five, and then 92 we only had one, and now we have none. So, what I'm asking is, these are audits on appeal (inaudible due to noise on tape) tend to be the same audits, is that why we see the number five, at least five carry all the way throughout to 91?" MR. BREWER: "Mr. Chairman, Representative Davidson, for sure in the early part of the period, there are very few taxpayers that we have not yet settled with and so, why the number would be static, I think that's a correct assumption that you're making - we're talking about the same two or three or four taxpayers. I don't know that I can say that about the later period." REPRESENTATIVE DAVIDSON: "Oh, I see. Thank you, Mr. Chairman." CHAIRMAN VEZEY: "Thank you and seeing no further questions -Representative Ulmer." Number 368 REPRESENTATIVE ULMER: "One quick question. Commissioner, the last time you testified before State Affairs, you indicated that the taxpayers have filed many amended returns, and I think the number you gave us was 69 percent of 3,393 returns, they've amended 2,739. That's the number that I wrote down. But I don't know what period of time that is and I don't know whether those were beyond the three years." COMMISSIONER REXWINKEL: "Mr. Chairman, Representative Ulmer, that was Mr. Pilkerton that made that statement and I have no knowledge, I have no specific knowledge - maybe Mr. Brewer does." REPRESENTATIVE ULMER: "I'll follow-up with him. Thank you." CHAIRMAN VEZEY: "Thank you. Representative Gary Davis." REPRESENTATIVE DAVIS: "Thank you, Mr. Chairman. Mr. Brewer, I think this was Exxon's testimony that indicated they were, in relation to the shoe on the other foot, I think they indicated that they were denied a refund because the statute of limitations had run out. Was that, I can't remember if that the insinuation - maybe not - maybe I heard it wrong. You don't recall that - okay. I may have interpreted it wrong." CHAIRMAN VEZEY: "Thank you. Seeing no further questions, Commissioner, I want to thank you and I'm sorry, I've already forgot the gentleman.." COMMISSIONER REXWINKEL: "Mr. Brewer." CHAIRMAN VEZEY: "Brewer - I should maybe write it down. I want to thank you both very much for your testimony and we do have two other people that have indicated they'd like to testify. I hope you'll stick around, feel free and if you'd like to make some comments, let us know." COMMISSIONER REXWINKEL: "Thank you, Mr. Chairman." CHAIRMAN VEZEY: "Mr. Walt Furnace with the Alliance. Mr. Furnace has left? Okay. Let me skip then - Mr. Jim Palmer, do you have some testimony you'd like to give." JIM PALMER, ALASKA OIL AND GAS ASSOCIATION: "Mr. Chairman, in the interest of time, I was going to testify on behalf of AOGA, but I think the State Affairs Committee has already heard that testimony, and there was nothing new, so I'll pass out that written testimony..." CHAIRMAN VEZEY: "Okay, you submitted your written testimony for the record? Mr. Sullivan, did you have some comments that you'd like to make? " MR. SULLIVAN: "I'd like the opportunity just to - again, I'm Paul Sullivan, General Tax Counsel, Exxon Company, USA. I thank you for this opportunity to speak to the three committees joint session. Mr. Chairman, I'd like to speak to some of the comments that have been made here this morning and just clarify, I think, a little bit to the extent that I can help this group. Mr. Hosie indicated that it was the position of the attorney general that the case would go forward under any circumstances this coming Wednesday. Now when I spoke with you folks, I was speculating and I'll admit that I was speculating, on exactly what was going to happen next Wednesday, and I speculated that they would take 377 up and I've not sat in on their strategy sessions. The point I'd like to make is that Mr. Hosie also indicated that the 78 case was a test case. And that's exactly what it was. There's been over the last two days, a lot of discussion about delay and the need to move the process forward. And it happened that we received our 78 income tax assessment, and there was a series of about eight of them, first. And it was the first year in which the opportunity arose to raise the question as to the interpretation of the three-year statute. And we did so. And, we then moved that through informal conference and I think I mentioned yesterday, that the case was bifurcated so that we could accelerate the resolution of the issue with respect to the interpretation of the statute of limitations. And it was a test case and the intent was to get it into the court system and get an answer on the interpretation of that statute of limitations on assessments question for the period from 1978 to as long as that law stayed on the books. Mr. Hosie says that it will go forward, but I would submit to you that it's no longer a test case. First, there will be arguments before the Supreme Court and then there will, if 377 is passed, likely be litigation with respect to the constitutionality of this bill. If this law were found to be constitutional, it would become the law of the land and I'm not sure exactly what the status of our 78 case would be, but I do know that it would not be a test case. That bill 377 -SB 377 - would be the law of the land from, at least 1979 forward. Therefore, it's a case that I would consider winning a small skirmish, but losing the war because what I might get, at best, would be a resolution of 78 and the statute of limitations, because I am in the court house. But it would not form a precedent for any year after 1978. So, the least you would be doing is enacting retroactive legislation to 1979 and possibly to 1978. There was a question, I think, that Paul Wessells responded to - excuse me, I'm (indiscernible) through my notes from the order of the testimony this morning - about a line between when does audit stop and assessment begin, and I want to clarify that you file your return, and there's a three-year statute and there's an ongoing audit during that period and you might get an assessment. And under the rules, I must appeal or protest that assessment within 60 days. And during that 60 days - or after that 60 days - I may get another assessment and I must within 60 days appeal that assessment. So there is no fine line. It's an ongoing process of an audit continuing, assessments being issued, protests being filed. As we approach the third year, I get a request for an extension and I extend. And let's just assume that I extend for another three years. I continue the audit and I continue to receive assessments and I protest those assessments. All of that interaction with the Department of Revenue is perfectly legal and acceptable and not one of those assessments is at risk under 377. It's only in my example, an assessment received after the three- year statutory period and in my example the three year extension that I gave - a total of six years of audit - any assessment received after that six year period that we are claiming is time barred under the current statute. There was a question to Mr. Wessells about whether BP would comply with the law if this law was passed. And I just want to reiterate the same answer that he gave you. The answer for Exxon Corporation is we comply with the laws of all the jurisdictions in which we act - we do business. I would also like to point out, as I did yesterday, that while we comply with the law, what you do here today or with this bill, is going to impact how Exxon Corporation assesses future investments in this or any other jurisdiction, based upon what they do with their laws. And one of the things you're talking about doing here is making a retroactive change for a period of 17 to 18 years and that gives us great pause. "Mr. Hosie said, who better to say what the legislature meant than the legislature and I'm sure you all appreciate that in 1976 the composition of this legislature was significantly different. And I believe that the job of this legislature is to pass laws. The role of the judiciary is to interpret the laws that you and others have passed. And I continue to believe that the proper forum for the question of the three-year assessment statute is the Supreme Court of the State of Alaska. The irony of that is that if I lose in the Supreme Court next Wednesday, or when the decision is issued, you will get SB 377 with respect to the assessment statute without ever having legislated a thing. If I win, then the Court will interpret the law that was passed in 1976 and if there's something you want to do in 377 to amend the statute prospectively, well, that's fine. "I would point out that Mr. Brewer about five years and the question of whether it's sufficient and his answer was yes. Neither the three-year statute that exists on the books today, nor the five-year statute is a end of the line, because extensions are still provided for. Mr. Brewer said he thought that companies in the future might not grant them, I'll go back to my jeopardy assessment example and I'll admit that in the example, and purely for purposes of the example, I said that the department could disallow all of our deductions. They could likewise determine a high side of reasonable or maybe a little bit higher, just to be sure, value of ANS and put it into the assessment to protect, as his job is to do, the revenues of the state of Alaska. So, this risk - I just don't see it. It's interesting in our Supreme Court case, the question was why does it take so long to get there. While the Standard case, now BP, was before the court on a declaratory judgment, Exxon was requested by the Department of Revenue to not move our formal conference on the issue of the statute of limitations interpretation forward at the formal conference. And I agreed with the then Commissioner of Revenue, Mr. Malone, to suspend action at his request, while the Standard case was heard in court. And that caused some delay so, it's not one-sided on these delays. "Mr. Hosie explained about the details in formal conference of depositions and discovery and witnesses and all that, and I testified about that yesterday, too, as a reason why taxpayers go to informal conference. It's attempting to solve and resolve issues or as many of the issues as you can in that forum which is a more, as the name says, informal atmosphere. It still makes sense to me to go that route. "Mr. Hosie said that, meaning the state, we've got to do something about the uncertainty of this situation. And I think he meant so that we could get on with settlements, and I'm speculating. He then went on to say that a constitutional challenge to SB 377 would add years to get the answer on the constitutionality of this bill. And, I can't reconcile those two. We are months away from a resolution of what the existing statute means, and SB 377 can only add to the time period that it's going to take to get a final resolution of where we are. You people have had some recent experience in that, in the Governor's proclamation and whether we had a constitutional special session, and you moved real fast. You got two days and you got it resolved. That's not going to happen if we have to have the courts involved in the constitutionality of this bill. Talked about extensions in the future, I could tell you that I cannot understand why Exxon would not give one in the future when the equivalent to a jeopardy assessment is the alternative. "Mr. Hosie went back into the relation back theory and again, as I said yesterday, he's making his argument before the Supreme Court to you. And all I'm asking for is allow him to make that argument to the Supreme Court and allow that argument to rise or fall for what the statute means from 1978 until today. Don't limit it to a little skirmish that a taxpayer wins 78, and this bill takes away the precedential value of that decision to any other year. "Number of auditors: Back in 78 and 79 when there was discussion by Mr. Brewer about limitations within the Department of Revenue. In looking at our 78 case, starting in August of 1979, the division started a detailed audit. Six auditors spent two weeks and then three auditors spent an additional month auditing Exxon's records in Houston and all for the full period and some for an additional period returned on several occasions to complete the audit. I don't recall or know how many auditors they said they had, but we had six of them at one time and three at another time in our offices in Houston reviewing the records. Mr. Brewer said that now amended assessments outside of the three year or the proposed five year, wouldn't happen. Well, year end 1993, dated December 31, 1993, and received on January 4, 1994, I got a revised assessment for the 1986 oil production tax. It was after the extensions given on that return. There are outstanding, at least in Exxon's case, in all instances, timely assessments on the crude value issue that exceed, and in many instances, significantly exceed, the royalty settlement values. I only mention that because there's been questions around how much money is at stake on the untimely assessments - that 2.9 or 3 or whatever it is number - that I don't have enough information to be able to tell you what that number is, but the timely assessments in the Exxon case significantly exceed royalty settlement values. The commissioner mentioned that in the formal conference setting, the job of the hearing officer is to determine the correct amount of tax. And I agree with that, but I'd add some words - It's the correct amount of tax, based on the outstanding timely assessments. Maybe I owe all of them, maybe I owe less and it's his job to determine what I owe, but only with respect to the amounts for which I have been assessed in a timely fashion. "There's been a lot of discussion about amended returns and I'd like to just do a little scene set for you on that. The production tax, as you know, is a monthly return. I need Dick's help on this, but I believe that the return is due either on 20th or the 25th day of the month following the month in which the transaction occurred. And I would hope this committee could appreciate that these are large corporations with significant volumes of crude oil moving - ANS crude moving - under a multitude of contacts, and we do file a return and use our best efforts to get - well, we file that return on time first - but the information flow, if you take the transactions that occurred on the maybe 29th, 30th, or 31st of the month, you have a period of 20 or 25 - and I just cannot remember which it is, but you get that information in and incorporate it in the return, and yes, a normal procedure is that in the following month, we don't just put that return down and leave it, we continue to do everything that we can to get it as totally accurate as possible. So yes, there is probably an amended return many, many times in the second month, following the month in which the transactions took place. "Representative Kott asked if the assessments were high. Mr. Brewer said not in the current time frame. I drew an implication from that that in the earlier periods, they might have been. I believe that to be true. Both the commissioner and Mr. Brewer talked about prevailing value, and prevailing value is not the issue before us today. The issue before us is retroactive tax legislation, but let me talk a little bit about prevailing value. I heard that prevailing value is a concept where the (indiscernible) calculated prevailing value exceeds the taxpayer's actual selling price, the department will bring the selling price up to the prevailing value, but if the taxpayer's actual selling price was higher, the state wants to share in that. Prevailing value is also used with respect to internally transferred oil. That's the oil that Exxon takes to its own refineries. There is no sale in that instance. Yet we try to calculate what is the market value for that oil because the production tax is based on that market value. And we do the best we can. Now after the fact, in many months, the fact of the matter is, that the state's calculated prevailing value is a number that is less than the number that we put on the return for that internal oil. The commissioner said that the higher of does not apply with respect internal transferred oil. He also said that the higher of did not apply to the income tax. I'm very pleased to hear that because my assessments say otherwise. Mr. Brewer said that market value is the goal. I agree with him. I also agree with the Chairman's comments earlier about this is a commodity and I do not see how oil moving to the same destination, on the same vessel, on the same day can have values for royalty, income tax and production tax that differ significantly. There may be some difference under the statutes of royalty, the arms-length bargaining versus the sovereign, with respect to statutory tax laws. But I submit it is still a commodity, and that commodity should have about the same value. That is not the case with our assessments. I cannot remember which representative - Representative Brice, I just remembered - asked about 200 pages of - a new assessment with 200 pages of supporting documents. Mr. Brewer said, well if that happened early on in the process, he could understand that, but, well that's all he said. That assessment received at 4:00 p.m. on the afternoon before a formal conference scheduled for 9:00 a.m. in the morning came on June 14, 1988. It was with respect to our 1978 income tax, so we're talking about a period of nine to ten years. "Representative Davies asked about extensions, that they're a very short document. All it says is the taxpayer and the state agree to extend a specified statute for a specified period. They are all-encompassing. It is for the complete audit of the return and any issue that might come up. I have not limited them, other than I indicated to you yesterday, that in December of last year, I was told specifically that the Department of Revenue needed some more time on a single issue and I said, then I will extend the statute for the reason that you need it, and that was rejected by the Department of Revenue. "Taxpayer amendment after the statute of limitation has run: Mr. Brewer said that the DOR (Department of Revenue) would put it in with the other assessments. I'm not sure exactly what that meant. I do know that we had a case where we had an issue - we had a right to claim a credit on our return, and we calculated the credit. And I don't know whether we're being conservative or what, but we under-calculated it. We left a bunch of dollars on the table. The statute had run, and we indicated to the Department of Revenue that we had made an error - and it was an error in the state's favor, and we were told that the statute had run and therefore, amending was barred. "We talked a little bit about the federal rules, about the only thing I can say (indiscernible) and it's something you may remember. Very recently the President paid up some taxes on something called Whitewater, and it wasn't a lot of money, but it was a reasonable amount of money, and he indicated that he was making that payment as a voluntary payment, because the statute of limitations had ran; meaning that the Internal Revenue Service could not collect that money from him. Yet, because of his position, he was going to pay the tax and it was a voluntary payment to the federal government. I notice on the table back (tape ends abruptly.) TAPE 94-67, SIDE A Number 001 MR. SULLIVAN: "...in that footnote, it begins by saying `alternatively, Exxon argues that.' The court never had to address the issue because our main argument was the statute is clear on its face. There is no ambiguity. The court agreed with us and we had argued in the alternative on constitutional issues. "Let me go back to my lawn mower yesterday. Ella claims his neighbor borrowed the lawn mower and returned it broken. The neighbor in his reply in the suit says `One, I didn't borrow it; two, if I did, it was broken when I got it; and three, alternatively when I gave it back it wasn't broken. If the court finds he never borrowed it, the court need not address the other two alternative arguments. Basically, that's what happened in our 78 case. The court found the statute clear on its face. A court doesn't like to issue decisions that it doesn't have to issue, and once it found that, it need not find anything else. "I think I've just about covered everything other than the fact that the commissioner or Mr. Brewer, I think it was the commissioner, handed out the appropriation history. The history goes from 1985 to 1995, without the authorization for 95. I'd be interested in seeing 78 to 84. I would also submit to you that if you compare the Department of Revenue's request versus authorization, the authorization is a percentage of the request. I think you'll find, it is in almost every instance, the highest percentage of any department. I just don't have the earlier numbers with me. I'll take any questions that anyone has." CHAIRMAN VEZEY: "Representative Bunde." REPRESENTATIVE BUNDE: "Thank you, Mr. Chairman. I'm tempted to ask what all these lawyers are doing in church with us farmers but I'll save that question. We've heard a lot of relatively complex testimony and I have a - maybe a failing of wanting to simplify or perhaps over simply, but I'd like to ask Mr. Sullivan if my simplification is relatively accurate, that if SB 377 passes and the state wins the court suit, the state wins. Is that correct?" MR. SULLIVAN: "I need to know which court suit you're talking about." REPRESENTATIVE BUNDE: "Supreme Court suit that we're -- you're going to address." MR. SULLIVAN: "Mr. Chairman, if SB 377 in its current form passes, and Exxon prevails in the Supreme Court next Wednesday..." REPRESENTATIVE BUNDE: "No, I'm sorry. Perhaps I wasn't clear. If SB 377 passes and then the state prevails in the Supreme Court, the state has essentially won." MR. SULLIVAN: "Yes, but the state would not have needed SB 377." REPRESENTATIVE BUNDE: "If SB 377 passes and the state loses, the state still wins." MR. SULLIVAN: "Mr. Chairman, that is correct." REPRESENTATIVE BUNDE: "And so what we're looking at is trial insurance here." MR. SULLIVAN: "Mr. Chairman, that is correct, Representative Bunde, assuming, and I'm making one assumption and that is that SB 377 is found to be constitutional" REPRESENTATIVE BUNDE: "Thank you." MR. SULLIVAN: "Yes, you're correct." CHAIRMAN VEZEY: "Representative Davidson." REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. Mr. Sullivan, it is my understanding that your company is the one that suggested deferral until after the ARCO litigation. That is to say that this case which the ARCO litigation which was resolved not until 1986 is the constitutional delay that we've had to deal with to deal with these tax questions from that period of 1978 to 1981, the period of separate accounting. Now if, in fact, that was your suggestion, it seemed that you set up another fork in the constitutional road to finality and I think you addressed that briefly when you talked about the word `alternatively.' Is that, in fact, correct?" MR. SULLIVAN: "Mr. Chairman and Representative Davidson, we did request a stay in those assessments and our reason was, as I said yesterday, that to address them and begin the process while the underlying legislation was being challenged didn't make sense to me as a good use of my people's time or the state's people's time. Therefore, we suggested let's see whether the law is found to be constitutional or unconstitutional. While I did make that request, not I but Exxon, the state's position was to continue the process of assessments, excuse me, audits and assessments, so that my request in no way slowed the Department of Revenue. The request was, in essence, rejected. Would it had sped up the process if the underlying law was found constitutional? I think so, we all would have saved some time. The underlying law was not found to be unconstitutional so the process continued. Were extensions granted? Yes. Was money at risk? Was I trying to play a game in order to get the statutes to run to avoid a liability. Absolutely not. That was not done. Extensions were granted." REPRESENTATIVE DAVIDSON: "But my point is that the suggestion for deferral of your extensions for -- somebody's extensions for assessment, it was suggested by your company that we defer this until after the ARCO litigation was resolved and that was not resolved until 1986." MR. SULLIVAN: "Our request, Mr. Chairman, Representative Davidson, was for not an extension, it was we had received an assessment and we were required under the regulations to answer within 60 days, that is protest the assessment. We complied with that requirement. We protested the assessment. What you were talking about is a cover letter that went with that protest that said, `here is the protest, you now know where we, Exxon the taxpayer, stand on your assessment. But we, Exxon, suggest that rather than beginning resolution, we wait and see what happens to the statute.' It is no different than the point that Mr. Hosie made this morning that as long as this conflict over the meaning of the statute exists, it will be very difficult for the companies and the Department of Revenue and the Department of Law to get together and resolve these. We were saying the same thing back then. There is a case on the constitutionality of the underlying law. How can we and the state resolve the issues when we don't even know whether the assessment relates to a tax that is constitutional. That's all that we were doing." Number 181 REPRESENTATIVE DAVIDSON: "So we did not know -- we did not know -- we did not come to resolution on the statute though until 1986. Is that correct?" MR. SULLIVAN: "And I would submit that with respect to SB 377 we may not come to resolution on its constitutionality, this is according to Mr. Hosie this morning, for another three to five years. And I further submit that if this legislation is not enacted, we will come to resolution on the meaning of the three-year statute in the next six months." REPRESENTATIVE DAVIDSON: "That leads to my other question, Mr. Sullivan. You talked about the constitutional issues and would you please identify them and then would you also comment as to whether or not the point of continuing in the lawsuit, does that -- does that continuation begin at that point. In this same lawsuit where Judge Cranston said these constitutional arguments have no merit." MR. SULLIVAN: "Constitutional arguments are as enumerated, Mr. Chairman, Representative Davidson, in the footnote three. They were that the DOR's interpretation of the statute of limitations violated the federal and state constitutional protections of equal protection, due process, and the right to petition for redress. He said there was no merit in these constitutional arguments because, in part, they found that our interpretation of the statute that it was plain and unambiguous on its face and that three years meant what it said. Three years, unless the parties extended, so there was no constitutional issue." Number 215 REPRESENTATIVE DAVIDSON: "So you have confused me, it regards the constitutional issues. You said that you will go back, in fact, and pursue those constitutional issues. My question then is what point do you start at? Back in which court and...." MR. SULLIVAN: "Excuse me. Constitutional issues of which I am talking about are not yet even filed. They are constitutional issues that are likely to be raised by taxpayers with respect to this legislation, SB 377, if it passes. There will be a question as to the constitutionality (indiscernible) SB 377, including the retroactive Section 1. Now, that's going to take a long time to resolve. It is obviously not filed in any court yet because we don't know what is going to happen to SB 377." Number 230 REPRESENTATIVE DAVIDSON: "Mr. Sullivan, I would remind you I think my understanding is correct. What the argument will be before the Supreme Court is whether or not 260 is amendable. It will not have, in fact, ruled on that?" MR. SULLIVAN: "The question, Mr. Chairman and Representative Davidson, before the Supreme Court next Wednesday will be whether Judge Cranston, in his decision in the Superior Court, correctly interpreted the statute. There will not be a constitutional issue. There will be a question as to whether Judge Cranston is correct. We will then have a decision from the highest court in the state of Alaska on whether three years means three years or, as Mr. Hosie talked to you about yesterday, whether there is a relation back theory that allows an assessment which comes after the three years including any taxpayer in the state agreed extension thereof is a valid assessment. Judge Cranston said `no.' The Supreme Court may say otherwise." REPRESENTATIVE DAVIDSON: "Mr. Chairman, I have one other question, if I may." CHAIRMAN VEZEY: "Please." REPRESENTATIVE DAVIDSON: "Mr. Sullivan, you talked about the cooperation or the cooperative appeals extension process that both the state and your company has, in fact, engaged in the past practice. And you talked about, I believe, the point that well maybe they just won't be as forthcoming in the future to extend these appeals." MR. SULLIVAN: "I did not say that, Mr. Chairman." REPRESENTATIVE DAVIDSON: "Well how did I get...." MR. SULLIVAN: "I indicated, Mr. Chairman, Representative Davidson, that I did not see a circumstance in the future where Exxon would not grant an extension because the option is, and continues to be, the right of the Department of Revenue to collect the revenues of the state of Alaska by issuing an assessment based on the best information available if I am not cooperating (indiscernible) consider to be. And they would then, as I said yesterday, maybe disallow my deductions on the basis that I had not (indiscernible) and they would value ANS crude at the high end of reasonable (indiscernible) and that is something which the Department of Revenue would have the right to do under the laws that exist today. So, now tell my why wouldn't I grant an extension. My option isn't that great and (indiscernible)." Number 283 REPRESENTATIVE DAVIDSON: "So, the high balling comment you had in your written statement yesterday was then that refers to the fact that, well it is really in your interest to grant appeals." MR. SULLIVAN: "Mr. Chairman, Representative Davidson, I'm scratching my head. I'm not sure whether it is or not. The reason being that having granted extensions in every instance, it's resulted in an increase in assessment. Mr. Brewer indicated that there were instances where there were amended assessments that went down. I have seen the department issue an assessment and then after we filed a protest, they have retracted the assessment recognizing (indiscernible) case to have issued the assessment in the first place. But in terms of new or amended assessments other than the revocation of one, it's always gone up. It is almost like as you get into the process and make your case it's pay us or get another assessment." CHAIRMAN VEZEY: "Thank you. Representative Davidson, you have a comment?" REPRESENTATIVE DAVIDSON: "Yes Mr. Chairman, I'm still confused and perplexed and I was wondering how you understood the idea of amending 260 before the Supreme Court. I did not quite -- could not understand Mr. Sullivan's response. If we're not, in fact, arguing that in the Supreme Court or the way he presented it, the way he talked about it, was he saying the same thing that I said or am I just lacking legal training?" CHAIRMAN VEZEY: "I believe Mr. Sullivan's testimony has been very consistent. I'm having difficulty understanding your question." REPRESENTATIVE DAVIDSON: "Well, my question was it's my understanding the constitutional question, the statutory construction of 260 has already been decided. It was decided that it was in favor of the industry or, in this instance, Exxon. And, yet, before the Supreme Court we have a constitutional issue. Isn't that correct?" MR. SULLIVAN: "No, Mr. Chairman, I think I understand Representative Davidson's question. The issue that was before the Superior Court was the interpretation, not a constitutional issue, but the interpretation of the statute. And in our complaint, we had an alternative argument and the alternative argument was more or less, if the state is right we're concerned about due process. And so constitutional issues were raised. Judge Cranston found not that the state was right, but that Exxon was right. Therefore, he need not address the constitutional arguments that existed in our alternative arguments. So now when we go to the Supreme Court next Wednesday, there is no constitutional issue per se that's being addressed by the Supreme Court. What is being addressed is whether a Superior Court Judge, Judge Cranston, correctly interpreted a statute. So this is just a higher court reviewing the interpretation by a lower court judge of the meaning of words in a statute." REPRESENTATIVE DAVIDSON: "That is helpful and that means that they will rule then whether or not the statute can be amended which is a statutory construction issue. Is that correct?" MR. SULLIVAN: "Mr. Chairman and Representative Davidson, the question of the amendment, you see, the statute can be amended, what we're talking about here today. Is that correct?" REPRESENTATIVE DAVIDSON: "No." MR. SULLIVAN: "Whether the assessment can be amended after the statute has run. That is correct. That is exactly what they're going to be asked to do is review an opinion that says that it can't, and the Supreme Court will decide either that opinion is right or that opinion is wrong. If they decide that that opinion is wrong, Judge Cranston's opinion, then in that event, you get SB 377 without passing a single bit of legislation. In the event they say that Exxon and the Superior Court Judge Cranston's opinion is correct, then we know what the law was. Is the situation of the Supreme Court upholding Judge Cranston's decision and the legislature passing SB 377, and in that event, the decision of the Supreme Court upholding Judge Cranston's decision is essentially mooted, if, subsequently SB 377 is found to be constitutional." REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman, I appreciate the time you've allowed me." CHAIRMAN VEZEY: "Thank you, Representative Davidson. Representative Davies." Number 370 REPRESENTATIVE DAVIES: "Thank you, Mr. Chair. Mr. Sullivan, Commissioner Rexwinkel talked about the statute that relates to the formal hearing process and you commented on that. And when the commissioner read that statute with respect to determining, loosely put, the correct tax - I don't remember the exact language - I didn't hear any limitation on that to timely assessment which you asserted. Can you tell me how you come to that conclusion or give me the citation where the linkage is there?" MR. SULLIVAN: "Let's skip the informal conference, please, if we can, Mr. Chairman, and just assume we are now in formal conference..." REPRESENTATIVE DAVIES: "It's just the formal -- the language as I recall was just for the formal conference, right?" MR. SULLIVAN: "Question number one is what is before the hearing officer?" REPRESENTATIVE DAVIES: "Right." MR. SULLIVAN: "What is before the hearing officer is a notice and demand for payment, otherwise known as an assessment. Also before the hearing officer is a protest filed by the particular taxpayer in question. That is the issue that has been joined. A notice and demand for payment and a protest that says, `I don't owe it or I only owe part of it.' He then calls for depositions and witnesses, discovery. Both sides hire lawyers, both sides hire experts and we all spend a lot of money. That's why I don't like to forget about the informal conference being submitted because sometimes that saves both of us a lot of money. But his charge is to look at what the Department of Revenue, Oil and Gas Audit Division - in the case of the production tax - has assessed, and what the taxpayer says in his protest, and decide what the correct tax on that documentation is. That's what's before him." CHAIRMAN VEZEY: "Thank you. Representative Finkelstein." MR. SULLIVAN: "Excuse me, could I follow-up on that." CHAIRMAN VEZEY: "One more." REPRESENTATIVE DAVIES: "Just on that.... But the assessment that he has in his hand may well be an amended assessment that was amended post the three-year statute." MR. SULLIVAN: "Mr. Chairman, it could be in an assessment that was issued eight years after the return was filed, assuming that there have been extensions as the next (indiscernible) case there have been. He may have before him six assessments. There might have been an assessment, protest, assessment, protest, extension, assessment, protest. Sometimes an assessment later in time negates an earlier one or incorporates it. Sometimes an assessment later in time is on an entirely new issue so the earlier one (indiscernible). So he can have a portfolio in front of him - two, three, four, five different assessments all of which now have worked their way up to formal conference. And basically at that point, forget about the assessments, you now have the issues and the various assessments. That's the portfolio that's before him and nobody references back to a particular assessment. It's just these are what are before you, which are to be decided by the hearing officer. That whole package." CHAIRMAN VEZEY: "Thank you. Representative Finkelstein." Number 423 REPRESENTATIVE FINKELSTEIN: "Thank you, Mr. Chairman. The question I had is on the analogy made earlier to the President and his taxes which, you know, of course, on the face of it, is appealing but as you look at it the difference is, is the President doesn't have any outstanding assessments against him. And it seems to me that, and I guess I'm trying to see -- doesn't your analogy only work if you'd actually settle - paid your taxes just as most of these other Alaskan oil companies have done." MR. SULLIVAN: "Mr. Chairman, Representative Finkelstein, it's an interesting question. The fact of the matter is I don't know whether the President's return was audited for that year." REPRESENTATIVE FINKELSTEIN: "But he has no outstanding assessments is the issue. We know that to be the case." MR. SULLIVAN: "As far as I know he had no outstanding assessments because of the statute of limitation have run. All I'm saying is there is an analogy there. It may not be perfect but what I perceive any payment that I might make on an assessment which is contrary to Judge Cranston's opinion is essentially equivalent to a voluntary payment, because Judge Cranston says it's not legally due." Number 441 REPRESENTATIVE FINKELSTEIN: "Right and just to make clear, none of this would be before us if, you know, if this case is settled. I mean it's only here because there is an outstanding assessment. They aren't trying to go back on something that was settled. It is one of the two cases that are left on this subject." MR. SULLIVAN: "Mr. Chairman, the Department of Revenue and the Department of Law are trying to increase the scope and dollar value of the issues from those that exist in the timely assessed assessments -- time received assessments. That's correct. I am not in any way indicating that the multitude of assessments received within the three-year statute, as extended, are at risk. They are not. They are valid and will be resolved." REPRESENTATIVE FINKELSTEIN: "Thank you, Mr. Chairman." CHAIRMAN VEZEY: "Thank you. Seeing no further questions - - I'm sorry, Representative Ulmer, you had a question." REPRESENTATIVE ULMER: "I'll pass, thank you." Number 454 CHAIRMAN VEZEY: "Okay, seeing no further questions, thank you very much Mr. Sullivan." MR. SULLIVAN: "Thank you." CHAIRMAN VEZEY: "Thanks for your time. What is the pleasure of the committee. Mr. Furnace, you'd indicated that you would sign in to speak. Would you -- do you care to pass or...." MR. FURNACE: "Mr. Chairman, I will submit my presentation to the committee later." CHAIRMAN VEZEY: "Thank you. What's the pleasure of the committee? Representative Davidson." Number 459 REPRESENTATIVE DAVIDSON: "Mr. Chairman, I have some pleasure and that would be to ask a couple of questions of Mr. Palmer and to the opportunity to hurriedly go through here, just a couple of short questions I'd like to ask if I could." CHAIRMAN VEZEY: "Mr. Palmer, are you agreeable to that?" JIM PALMER: (Indiscernible.) CHAIRMAN VEZEY: "Please, Representative Davidson." Number 469 REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. Good afternoon, Mr. Palmer. Say, Mr. Palmer, on page two, you talk about not one of those states have ever retroactively amended their statute of limitations. Has any one of those states ever had a separate accounting litigation issue such as we're talking about here for the last forty-eight hours or eighteen years?" MR. PALMER: "Mr. Chairman, Representative Davidson, I can't answer that with any authority. I know that there has been litigation about methods of income taxes throughout the United States, but I can't answer that with any authority." REPRESENTATIVE DAVIDSON: "Thank you." REPRESENTATIVE DAVIDSON: "Just one other question then, Mr. Chairman, if I might." CHAIRMAN VEZEY: "Please." REPRESENTATIVE DAVIDSON: "On page one you talked -- it said `it would set a terrible precedence which provoking more litigation.' Could you please expand on what kind of litigation you're talking about and whether or not we're talking about the constitutional, I don't want to put any words there, what kind of more litigation would it provoke in your judgment?" MR. PALMER: "Mr. Chairman, Representative Davidson, I think much more eloquently than I, Mr. Sullivan has answered that question. I think if 377 gets passed, when you have legislation that reaches back 18 years there is a question of `is that a constitutional thing to do.' And I would think that the companies will look at that and decide to take action in -- exercise their legal rights." REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman." MR. PALMER: "Thank you, Mr...." CHAIRMAN VEZEY: "Representative Nordlund." Number 490 REPRESENTATIVE NORDLUND: "Mr. Palmer you a -- you're an employee of BP, is that correct?" MR. PALMER: "That's correct." REPRESENTATIVE NORDLUND: "And you're a member of the Board of AOGA or what's your position with AOGA?" MR. PALMER: "My company is a member of AOGA." REPRESENTATIVE NORDLUND: "And your the representative from BP on AOGA's Board...." MR. PALMER: "No, Mr. Chairman, Mr. John Morgan, President of the company is our member on the board." REPRESENTATIVE NORDLUND: "Okay. And how many organizations are there in AOGA, how many different companies?" MR. PALMER: "It was in my testimony, which I don't have before me, but it's a number of oil and gas producers and marketers in Alaska." REPRESENTATIVE NORDLUND: "Okay. And your position -- AOGA's position is against this bill as I understand it." MR. PALMER: "Mr. Chairman, AOGA's position is opposed to Sections one and two of Senate Bill 377. They have had a formal position opposing retroactivity." REPRESENTATIVE NORDLUND: "Okay, and there are other companies in AOGA that have paid taxes under the existing scheme and under the way the state's interpreting the statute right know. Is that correct?" Unocal and Marathon, Mobil...." MR. PALMER: "All the companies have paid taxes under the current scheme." REPRESENTATIVE NORDLUND: "And it would seem to me that those companies, and we haven't heard that here yesterday or today, but is seemed to me those companies who have paid under the existing scheme -- assumedly paying more taxes than BP would have to pay or Exxon would have to pay if this bill, if this bill passes. It would seem to me that they would be at least neutral if not opposed to this bill, and I'm just wondering if you say -- you say you represented the position of AOGA, how did AOGA come to that position given the varying interests in the company, members of AOGA." MR. PALMER: "Mr. Chairman, Mr. Chairman, the way that AOGA works is the committee makes a proposal on a position, then it goes to, usually the board if necessary, and the board approves that position. The AOGA board did approve this position of opposing the retroactive aspects of Senate Bill 377. The AOGA board has not taken a position on the other elements included within Senate Bill 377. So there is no position -- formal position of AOGA." REPRESENTATIVE NORDLUND: "Okay, and when you arrive at those positions, they are not necessarily unanimous. Are they voted on? Because some members may have voted `no' and some might have voted `yes,' a majority voting `yes' and that's you're position?" MR. PALMER: "I'm not, Mr. Chairman, I'm not familiar with the facts surrounding that position of whether what companies voted how." REPRESENTATIVE NORDLUND: "Thank you." Number 514 CHAIRMAN VEZEY: "Thank you. If there aren't any further questions at this time -- I'm sorry one more...." UNIDENTIFIED SPEAKER: "No." Number 524 CHAIRMAN VEZEY: "Thank you very much, Mr. Palmer. At this time I'd like to ask the committee aide to distribute a committee substitute we've prepared based on the comments on the technical aspects of the bill. If it's the committee's pleasure, we can review it know or we can take a short break and come back and review it. Representative Davidson." REPRESENTATIVE DAVIDSON: "Explain it first. Mr. Chairman is this essentially the bill that we've been discussing? Is this the same one or have there been changes to this?" CHAIRMAN VEZEY: "We will go over the changes. There have been changes based on the comments that we made primarily yesterday. Representative Ulmer." REPRESENTATIVE ULMER: "Mr. Chairman, I think it would make sense to just go through the changes." CHAIRMAN VEZEY: "Okay, we can do that at this time or people want to take a break? We've been at it about an hour and a half. Let's take a break and come back at 5:00 p.m." A break was taken at 4:42 p.m. The meeting was called back to order at 5:01 p.m. CHAIRMAN VEZEY: "Come back to order. It's 5:01. We have before us a proposed committee substitute for Senate Bill think, are fairly simple to explain. On page 2, line 31, the word `prospective' has been inserted before the word `adjustment.' On page 3..." REPRESENTATIVE DAVIES: "Mr. Chair." CHAIRMAN VEZEY: "Yes." REPRESENTATIVE DAVIES: "Aren't there changes up on line 2?" CHAIRMAN VEZEY: "On line 2?" UNIDENTIFIED SPEAKER: "Yes." CHAIRMAN VEZEY: "4 and 5. Okay." REPRESENTATIVE DAVIES: "Line 2, `decreases' was eliminated then..." CHAIRMAN VEZEY: "Okay, I'm sorry, that is correct `decrease' was removed and that was taken down to the last sentence. I'll have to look at the other wording (indiscernible)." REPRESENTATIVE DAVIES: "Yeah, there was a new clause entered on line 5 for the decrease." CHAIRMAN VEZEY: "I... I think the intent hasn't changed, it's different wording to express concerns that were expressed here. And then the word `prospective' inserted on line 31. In paragraph (c) on page 3, line 10, the word `may' was changed to `shall.' And in response to Representative Davies comments, the word `percentage' was inserted before`weights' to clarify that we're talking about a percentage weights. And then on line 11, the word `may' was changed to `shall.'" REPRESENTATIVE DAVIES: "And `different' was omitted also, which was good." CHAIRMAN VEZEY: "And I'm sorry, I don't have the deletion. What was deleted?" REPRESENTATIVE DAVIES: "Different." REPRESENTATIVE GAIL PHILLIPS: "Different weeks." REPRESENTATIVE DAVIES: "Which is the main point of my comment, so I appreciate that change." CHAIRMAN VEZEY: "Okay. Then on line 14, the word `market' was inserted before `assessments.' Page 4, line 9, `$1' was changed to `$2.' We added a phrase `adjusted annually for inflation in accordance with the Consumer Price Index.' Same change on line 22 through 24. A comparable change is found on page 5 on line 19 and 20. And a comparable change is found on page 6, line 1, 2, and 3. Those constitute the changes. `Section 10' now becomes `Section 7.' We deleted all of the sections of the Senate Bill that was before us that did not pertain to oil and gas or to the proration of payments. All the other matter in the bill has been deleted. Section 10 and 11 were adjusted to reflect the content of the current committee substitute. Representative Phillips." REPRESENTATIVE PHILLIPS: "Mr. Chairman, we forgot one amendment and that was on old page 5, Section (d) so it would be...." CHAIRMAN VEZEY: "No, that was not forgotten. Leg Legal maintains that the paragraph is the correct word." REPRESENTATIVE PHILLIPS: "Okay." CHAIRMAN VEZEY: "So I got it corrected and...." REPRESENTATIVE PHILLIPS: "Okay - thank you." Number 582 COMMISSIONER REXWINKEL: "Can I ask a question." CHAIRMAN VEZEY: "Please if you join us at the table so the microphone picks up your voice." COMMISSIONER REXWINKEL: "I was just going to ask on the retroactive provision on the one -- the $1 to $2 in the CPI this is retroactive to 1985 so that means the CPI would be begin to (indiscernible) in 1985?" CHAIRMAN VEZEY: "Well, that really wasn't our intent but the testimony we got was that the figure was somewhat arbitrary. It was a figure between 56 cents and $5 and so we didn't really -- $2 was just another fairly arbitrary number. It was our intent that the CPI would start on the effective date of the bill. I'd have to go back. We may not have effected that. The effective date of Section 4 is retroactive to January 1, 1985. So I think that would -- you would be correct in your interpretation. It wasn't really our intent when we made that amendment." Number 594 REPRESENTATIVE ULMER: "Mr. Chairman." CHAIRMAN VEZEY: "Representative Ulmer." REPRESENTATIVE ULMER: "On that point, does in fact inflation affect the processing costs or the transportation costs or do those tend...." CHAIRMAN VEZEY: "This is not a automatic inflation. The statute says it may not exceed a figure and since we're putting a number in statute, I felt that rather than have to come back every five years and address the statute, we should allow the ceiling number to escalate. It could still be 56 cents." REPRESENTATIVE ULMER: "How will that be determined?" CHAIRMAN VEZEY: "Well, we weren't told that in our testimony. We assumed it would be through the audit process that we have heard. Representative Nordlund." Number 603 REPRESENTATIVE NORDLUND: "Thank you, Mr. Chairman. If I remember the testimony based on the $1 per barrel, it was a loss to the state of $100 million prospectively as well as a loss of $100 million retroactively for a total of $200 million." CHAIRMAN VEZEY: "I don't believe it was tied to the dollar per barrel for the cost of processing. I believe that was the state's contention of the value of giving up gas liquids as a oil in assessing it for tax values of the gas. That hasn't changed." REPRESENTATIVE NORDLUND: "But the impact of that would have been something near those sums, is that co -- I mean..." CHAIRMAN VEZEY: "No, I don't believe that's changed in this committee substitute because we're not talking -- the $1 was not -- contributed to that figure that you talked about that could be as high as $250 million. That was (indiscernible- coughing) state felt was at risk (indiscernible) agreed it would not assess gas liquids as oil as opposed to assessing gas liquids as gas." REPRESENTATIVE NORDLUND: "I wonder if we could hear from some of the folks from the Department of Revenue on this because I'd be concerned that we -- if before we were giving away $100 million or $200 million if under this change we're giving away $400 million." CHAIRMAN VEZEY: "Commissioner Rexwinkel." COMMISSIONER REXWINKEL: "Mr. Brewer will try to give a shot at that." Number 618 MR. BREWER: "Very roughly, Mr. Chairman, the impact of the increase from $1 to $2 the processing fee. When we took into account the numbers that we were talking about 100 retroactively, 100 prospectively, that did take into account not only the change from oil to gas, but it also took into account the fact that they got a processing fee of $1." CHAIRMAN VEZEY: "The testimony that we got would not exceed $1." MR. BREWER: "Right, but our - our fiscal impact computation took into account the fact that not only does the tax rate change, it goes from a nominal rate of 15 percent to 10 percent, but it also took into account the fact that they get $1 processing fee." CHAIRMAN VEZEY: "But you weren't conceding the dollar, you were just using that for your calculations." MR. BREWER: "Right." Number 628 MR. BREWER: "Very roughly what does it mean when you go from giving a processing fee of $1 to $2. These are real rough numbers, but I just assumed that you're going to be producing sixty thousand barrels a day of NGLs. I assume that it's the same time frame we were talking about a couple of days ago which is an eighteen year time frame. It goes through the year 2004. I multiplied the sixty thousand barrels, per day, times $1. So it's worth $60,000 per day. The nominal tax rate is 10 percent, 10 percent of $60,000 is $6,000 a day. Multiply it by the number days in a year, 365. Multiply those days -- multiply that by the time frame we're talking about which is eighteen years. I don't have the ability to... Representative Green is..." CHAIRMAN VEZEY: "It sounds like we're talking somewhere in the order of $50, $60 million." MR. BREWER: "Yes, sir, we are talking $40 million, not adjusted for interest and not adjusted for the time value of money." CHAIRMAN VEZEY: "But that's assuming that you'd grant the $2 processing fee." MR. BREWER: "The increase from the $1 processing to $2. That's right." REPRESENTATIVE GREEN: "That's how much again, I'm sorry." MR. BREWER: "I calculated, again, no interest component. You know, I'm not increasing it for interest in the past, and by the same token, I'm not discounting it for the future. It just so happens that 94 is kind of almost in the middle of between 87 and the year 2004 so maybe they wasH. But I get $39,420,000." CHAIRMAN VEZEY: "Representative Phillips." Number 647 REPRESENTATIVE PHILLIPS: "Thank you, Mr. Chairman. The language that's in here `may not exceed' is the same problem we had with the $1 figure. It could be 25 cents as long as it didn't exceed $2. So I'm not arguing the $2 versus $1. I'm arguing that phrase `may not exceed,' and I think that should be rewritten in some way. I substituted the words `will be' earlier but I don't know if that's correct or not." CHAIRMAN VEZEY: "I'm sorry if you've made that recommendation, I didn't write it down." REPRESENTATIVE PHILLIPS: "No, I'm -- in my mentally. I was starting to get away from -- and you do read my mind, Mr. Chairman. I was trying to get rid of the ambiguity in `may not exceed.'" CHAIRMAN VEZEY: "Representative Porter." Number 654 REPRESENTATIVE PORTER: "Mr. Chairman, I don't have any ambiguity in this unless I'm misunderstanding something. There is no firm figure on this allowance now. You are trying to establish what it really is and you have the authority to make that determination. Is that correct?" MR. BREWER: "Mr. Chairman, Representative Porter, my idea of the theory behind capping it at $1 or $2 is that that facility up there is a very unique facility. It's the only one like it, possibly in the world, but for sure in the entire United States you will not find a facility like that. It does a number of things. I mean it does a lot of things. It dries the gas, it makes residue gas. And so I mean there is a lot of components of that facility and you can get -- every taxpayer here in the room to look at that facility and try to determine what component parts of that facility are allocable to NGLs so that they can get a deduction, and I can say some certain that each taxpayer will come up with a different number. My thought was that the inclusion of this bill in here and just at a $1 or whatever it is, is going to take away our experts, our hiring of experts coming in and saying, you know, you should allocate part of the scrubber and 20 percent of the scrubber or 50 percent of the stabilizers. I mean, we would get out of that type of a point, counterpoint type of a conversation and just say `this is the number,' and then we would -- and I understand what you're talking about up to and those types of problems." REPRESENTATIVE PORTER: "As I understand it, this wording was provided by the division and the wording is `may not exceed' not `$1.' So aren't you kind of getting two bites out of the apple there. You set it at a dollar but you can't go lower. The testimony was that the dispute was something between 56 cents and $3 to $5. Trying to seek a balance." MR. BREWER: "Mr. Chairman, Representative Porter, that dollar was pretty much the number that we were willing to live with. That way we wouldn't have a battle of the experts as to what parts of the facility are allocable to MI and what parts of the facility are allocable to gas liquids and those types of things." REPRESENTATIVE PORTER: "But your wording is `may not exceed' not `we'll live with a dollar.'" MR. BREWER: "I understand." CHAIRMAN VEZEY: "Representative Green." Number 684 REPRESENTATIVE GREEN: "Thank you, Mr. Chairman. You're assuming, I think, that if it goes from a possibility that it would not exceed $1 to not exceeding $2 automatically that that extra dollar will go in. Isn't that a deduction, in fact, and so what you're doing that you're -- if it, in fact, went to $2 that would be a less taxable amount. Not a straight dollar loss." MR. BREWER: "Mr. Chairman, Representative Green, this would be the amount of money (indiscernible-coughing) right now that we would be foreclosed from assessing. I mean we have a position which says that those liquids are oil." REPRESENTATIVE GREEN: "I understand." MR. BREWER: "And that's the number, and the effect of increasing it from $1 to $2, if in fact, we do give or allow a $2 processing fee is to reduce the amount of our assessment that's out there right know by that amount of money." REPRESENTATIVE GREEN: "Taxable on that dollar, not the straight dollar." MR. BREWER: "Right, the tax..." REPRESENTATIVE GREEN: "And I think that's a very important point, that you're not losing a dollar for every barrel that may be produced..." TAPE 94-67, SIDE B Number 001 REPRESENTATIVE GREEN: "...the maximum it could cost would be the taxation on the extra dollar." MR. BREWER: "That's correct." REPRESENTATIVE GREEN: "Okay." MR. BREWER: "Which is $40 million." Number 009 MR. BOTELHO: "Mr. Chairman, could I comment on this section just very briefly." CHAIRMAN VEZEY: "Please, just -- please state your name clearly for the record." MR. BOTELHO: "Mr. Chairman my name is Bruce Botelho, Attorney General. The ambiguity, if there is one in this section or in this paragraph actually, is whether we have created another audit dispute with industry or whether we're trying to set a specific amount that should be the ceiling and I think that gets to Representative Porter's question earlier and it comes in two places. One is `the not to exceed.' Should we read this to say `the department must accept any number up to $2 without question, or is it number two, `the taxpayer may claim up to $2 but the department may now go back and determine whether it is a reasonable allowance. Or a third alternative which I think, again, Representative Porter alluded to simply fixing an amount. It's not less than, but it's also not more than. The language creates at least the ambiguity that the department may still go back in, try to determine whether the amount claimed, if it's at the maximum $2, was a reasonable allowance. Then it becomes a policy call whether that's where you want your division to be (indiscernible)." REPRESENTATIVE GREEN: "If I might, thank you Mr. Chairman. There was testimony given yesterday that because of the wording, which is identical to what it was, except for the $1 and $2, there was testimony yesterday that this, in fact, did allow it to be 56 cents because of the way it's written which says that it will not exceed but could be lower than." MR. BOTELHO: "Mr. Chairman, if -- again, I only point out the latents, I think ambiguity. Certainly, this committee's perception, as Chairman Green has expressed it, I think removes some of that. But, again I know that any bill we deal with, that deals with oil and gas is going to be litigated at some point so it's important to make sure that right now you're not operating on the misapprehension that the department might not challenge a tax (indiscernible) who claims $2 or $1.95 about whether it's reasonable or not. As I understand it, Representative Green understands that the department should have that ability, but that a taxpayer may well claim the full $2. And to the extent, it can justify that it will be entitled to that $2 amount." CHAIRMAN VEZEY: "Representative Porter." Number 083 REPRESENTATIVE PORTER: "I think you just answered my question, but to the extent that he can justify it he should be entitled to $2 and we're setting a..." MR. BOTELHO: "... statute is drafted, that is correct." REPRESENTATIVE PORTER: "...we're setting an absolute that the extent that he could justify $3, he won't be entitled to." MR. BOTELHO: "That's also correct, Mr. Chairman." CHAIRMAN VEZEY: "Representative Davies." Number 092 REPRESENTATIVE DAVIES: "Mr. Chair, just to see if I can get this right and sort of taking off from Representative Green's question, it seems to me that what the attorney general is saying is that there are - there are at least two ways that we could arrive at a tax that was 56 cents. One would be that the industry would come in and would only claim that amount. You know, when it says `may not exceed,' the industry would look at it (indiscernible) and they would say `I'm only claiming 56 cents.' The other way is that the industry could go in and claim some amount in excess of that, up to $1 or $2 or whatever we had this limit in there. And then the department would audit that and say, `no, we - we're not going to allow that and we're going to only allow 56 cents.' Is that really what you're saying that's the ambiguities that could be read those two different ways." MR. BOTELHO: "Mr. Chairman, I have to admit that I have lost it at some point. I believe that it's because of Representative Davies' explanations." REPRESENTATIVE DAVIES: "I'm getting a little ambiguous myself, maybe." CHAIRMAN VEZEY: "Representative Phillips." Number 131 REPRESENTATIVE PHILLIPS: "Mr. Chairman, would it be possible to put a basement and a ceiling in this paragraph both? Would that clarify things or help matters any?" CHAIRMAN VEZEY: "I don't know. I would ask the department." MR. BOTELHO: "Mr. Chairman, if it would be possible perhaps to take a ten minute recess to look at the question more fully and outside the pressure of sitting up here, we might be able to resolve that very question. Let me identify one other, I think, inadvertent (indiscernible.) It existed also in the earlier versions and that is Section 10, which deals with the effective date, refers only to Section 4, (indiscernible) retroactive to January 1, 1985. My sense is that it should read Sections 4 and 6 of the (indiscernible) retroactive to January 1, 1985." CHAIRMAN VEZEY: "Before we take a break, and I -- you had me fooled, you look very relaxed sitting there at the table so I wouldn't have accused you of being under pressure but...." UNIDENTIFIED SPEAKER: "Go through and finish the rest of it." Number 151 REPRESENTATIVE PHILLIPS: "Mr. Chairman, maybe while they go, we could do the pro rata part." CHAIRMAN VEZEY: "Let's finish the oil and gas. I think we're almost done, if we're not done, then we can certainly, we can go on to pro rata and you folks can come back and we can set a time to have you come back. And we're certainly - - you know it's not fixed, we certainly can amend that phrase in those four locations. I believe we've addressed all the changes in the oil and gas issues except, obviously Section 10 and 11 which were adjusted for the new bill. It's been suggested that we modify Section 10, amend it to read Section 4 and 6. And that puts us back to Section 7 which is proration of payments. And with that, we would excuse you gentlemen and... do you want to set a time to come back and get with us?" MR. BOTELHO: "We certainly would. Mr. Chairman, do you have any staff person you would like to work with us as we review this issue." CHAIRMAN VEZEY: "Who's available. Mr. Ryan, you got time to a...." UNIDENTIFIED SPEAKER: "Representative Green." CHAIRMAN VEZEY: "Pardon." UNIDENTIFIED SPEAKER: "Maybe Joe Green?" CHAIRMAN VEZEY: "He said staff." MR. BOTELHO: "Or any member of your committee." CHAIRMAN VEZEY: "We cannot do any legal drafting this afternoon. I allowed the Leg Legal to let their people go home about 2:00 this afternoon when they finished this CS. So it would be tomorrow before we could take any changes..." MR. BOTELHO: "Whatever we come back with will not be anything that would make the bill anymore complicated than it is." CHAIRMAN VEZEY: "Good. And so that takes us down to Section 7 which is proration of payments. Representative Ulmer, you had indicated that you'd like to take testimony from the agencies. I would submit that it's -- I think we understand the issue (indiscernible) the technical aspects of this issue that we really have questions about, it's more less the effect of what this would do." Number 187 REPRESENTATIVE ULMER: "Mr. Chairman, I think the problem is, it is not clear on its face, exactly which programs would be impacted by it. I believe that there is some question, for example, as to whether or not it would apply to AFDC or any other program that has federal dollars attached to it, and because it is my understanding this section has not ever had the benefit of a public hearing at which people from the agencies that know these programs could explain how it might actually work, that there is a lot of confusion about how it would work and, I would like to get something on the record about that." CHAIRMAN VEZEY: "Okay." REPRESENTATIVE ULMER: "...something that has this kind of impact. I do not want to delay the hearing. I'd be just as happy if we wanted to jettison this section and save it for another year, but if people don't want to do that, if they really, you know, want to go forward with it, I think it deserves some sort of comment on the record." CHAIRMAN VEZEY: "I certainly have no problem taking testimony. If you're through, Representative Davies would like to ask a question. Representative Davies." REPRESENTATIVE DAVIES: "Well Mr. Chair, my question is contingent on what you decide to do, so I'll just wait." CHAIRMAN VEZEY: "It would be my desire that we take action on this section. I would prefer to see it go to the floor. I'd like to see the whole body address this issue. I have no problem taking testimony. Please continue." REPRESENTATIVE DAVIES: "I guess that -- I'm -- having this section go to the floor and taking testimony are two different things because we can't take testimony on the floor so...." CHAIRMAN VEZEY: "Take testimony at this meeting, yes." REPRESENTATIVE DAVIES: "You mean right now or do you mean tomorrow or when do you mean?" CHAIRMAN VEZEY: "I'd like to continue this evening." REPRESENTATIVE DAVIES: "Mr. Chair, do you think that we can get the departments here this evening?" CHAIRMAN VEZEY: "Do you think the administration could get the legislature here today? All I'm saying is we were not consulted on the administration's schedule for the special session, so I'm not really concerned about their schedule. We'll get them here." REPRESENTATIVE DAVIES: "Well, I guess -- I, you know -- if they're here and we can get the testimony, then I would be satisfied. If, for some reason because of the hour, we can't get them here, then, you know, I really would like to have an opportunity to hear from them before we go to the floor with this (indiscernible)." CHAIRMAN VEZEY: "Representative Phillips." Number 231 REPRESENTATIVE PHILLIPS: "Mr. Chairman, another - another possibility, too, would be to have statements from the different agencies for -- when we bring it to the floor - possibility." CHAIRMAN VEZEY: "Well, I would like to bring the proration issue forward to the body. So why don't we take an at ease for fifteen minutes. Come back at a quarter to five, I'm sorry quarter to six. I'm sorry. Representative Bettye Davis." REPRESENTATIVE B. DAVIS: "Mr. Chairman, before you do that, would you like to know who would be interested in having them come. Actually, I would like to put you in charge of getting those people, Representative Davis." REPRESENTATIVE B. DAVIS: "Oh, you would? I was going to give you a list of.... You have the influence to get em here. You said they would be here, so I will give you the list." CHAIRMAN VEZEY: "I don't have your charming personality, Representative Davis. Why don't we stand at ease until quarter to six and Representative Davis and Representative Ulmer, if you would help, we can find out when we can expect the administration folks to show up." An at ease was taken. Number 255 CHAIRMAN VEZEY: "Call the meeting back to order at 6:03 p.m., May 14. I have before me a proposed amendment proposed by the administration. I will read it. I think it's simple enough that if people like, we can copy it and have it distributed but -- there are four places in the bill where the $2 per barrel of plant liquids is discussed. In each of those four places we would delete the words "for inflation in accordance with' and substitute the words `at one quarter of,' so that it would read `adjusted annually at one quarter of the Consumer Price Index.' Is there any objection or is there any discussion? First, is there any discussion on that proposed amendment?" Number 273 COMMISSIONER REXWINKEL: "Mr. Chairman, the reason for the one quarter is that, a substantial portion of the cost that the facilities represent (indiscernible) costs that are not subject to ongoing inflationary adjustments. And the 25 percent would be a recognition (indiscernible)." CHAIRMAN VEZEY: "Representative Sanders." REPRESENTATIVE SANDERS: "Mr. Chair, have we adopted this CS?" CHAIRMAN VEZEY: "Actually, that's a very good point. We have not adopted this CS, so we can't amend it. Could you make a motion to that effect for the State Affairs Committee folks?" Number 285 REPRESENTATIVE SANDERS: "I certain would sir. So moved." CHAIRMAN VEZEY: "Would the committee aide call the roll." JOSEPH EASAW: "Representative Al Vezey." CHAIRMAN VEZEY: "Yes." JOSEPH EASAW: "Representative Harley Olberg." REPRESENTATIVE OLBERG: "Yes." JOSEPH EASAW: "Representative Fran Ulmer." REPRESENTATIVE ULMER: "Yes." JOSEPH EASAW: "Representative Bettye Davis." REPRESENTATIVE B. DAVIS: "Yes." JOSEPH EASAW: "Representative Gary Davis." REPRESENTATIVE GARY DAVIS: "Yes." JOSEPH EASAW: "Representative Jerry Sanders." REPRESENTATIVE SANDERS: "Yes." JOSEPH EASAW: "And Representative Pete Kott." REPRESENTATIVE KOTT: "Yes." CHAIRMAN VEZEY: "So we have adopted `Version I' of House committee substitute for committee substitute for Senate Bill #377 (State Affairs). And I will continue at the amendment that I just proposed to the body for discussion before we bring it to the State Affairs Committee for adoption. Is there discussion? Seeing none, is there objection from the members of the State Affairs Committee to the adoption of that amendment? Seeing none, we will - will adjust the - we will make those amendments and prepare a new committee substitute." Number 298 MR. BOTELHO: "Mr. Chairman, can I call to your attention again Section 10 that needs to include (indiscernible.)" Number 303 CHAIRMAN VEZEY: "I will move that Section 10 be amended to read, `Section 4 and 6 of this Act is retroactive to January 1, 1985. Is there discussion? Is there any objection from the members of the State Affairs Committee to - that amendment. Seeing none, it is adopted. "Further discussion on the oil and gas issues which would be everything except, I believe, virtually Section 7 of this committee substitute." REPRESENTATIVE NORDLUND: "Mr. Chairman." CHAIRMAN VEZEY: "I'm sorry, Representative Nordlund." REPRESENTATIVE NORDLUND: "(Indiscernible) we get the opinion or the position of both departments on the change going from the one to two." MR. BOTELHO: "Mr. Chairman, to the extent that... and I believe that it has been confirmed by various members of the body commenting on the bill that there is a recognition. The department may put individual companies to (indiscernible) cost. (Indiscernible) agreement with the language that this committee has put forth which is now included in (indiscernible) the latest amendment to the committee substitute." Number 323 COMMISSIONER REXWINKEL: "Mr. Chairman, I would agree with that." CHAIRMAN VEZEY: "Thank you, sir. Further questions? If there aren't any more questions or comments about the oil and gas issues, I don't see any reason why we can't move on and discuss proration pending the arrival of one of our witnesses. I'm sorry, is there a comment there?" RAGA ELIM, Legislative Liaison, Office of the Governor: "I'll be speaking to that." CHAIRMAN VEZEY: "Oh please, come forward and state your name for the record, if you would." Number 329 MR. ELIM: "Thank you, Mr. Chairman. My name is Raga Elim, Legislative Liaison for the Governor. I am available to speak to the issue of proration to the best of my ability. I'm familiar with it, we've had discussions within the administration over the last couple of days on this, so I feel adequate to speak to it at some level. I apologize, I sought -- attempted to reach commissioners and some other folks a few minutes ago, but didn't have any luck." CHAIRMAN VEZEY: "Would you care to comment on the section of the bill before us or do you just want to take questions?" MR. ELIM: "Let me make some introductory remarks and then try to answer any questions." CHAIRMAN VEZEY: "Mr. Raga, I realize you probably were not planning on testifying. Would you like some time to work on some remarks?" MR. ELIM: "No, I'm comfortable with that." CHAIRMAN VEZEY: "Mr. Raga, wait a minute, I apologize." MR. ELIM: "It's okay. To begin with one of the first analysis was to identify what programs we thought would be affected by this proration language, and it was determined that the following would be covered: Longevity bonus, aid to families with dependent children, adult public assistance, general relief program, day care assistance, and burial assistance. I'll also speak to Medicaid and general relief medical, in terms of how those may be affected by this. Beyond that, there are some formula programs which exist but are already covered by proration language, most notably the foundation formula for education. In general terms, the feeling within the administration is that on the one hand, the effect of the proration would be to mitigate the situation of short funding of a program and having individuals cut off of some program for a specified period of time at the end of the fiscal year, absent adequate funding. So by prorating downwards it sort of mitigates the effect to the individual over the course of the year. On the other hand, it also, in some respects, shifts the burden from the legislature to the administration with respect to those programs and those served by it, and there is some concern about whether that is appropriate or perhaps fair, for lack of a better word. "Let me speak to some of the programs that may arguably be impacted by proration but in which arguments can be made that they would not be affected by it. And I am also having two memos that were prepared by the Department of Health and Social Services reproduced right now that we'll provide to you. But with respect to Medicaid and general relief medical, the feeling is that the proration language would not impact those programs because the statute already provides a list of services that are offered to the extent that there is adequate funding, and if there is not adequate funding, services are taken off the list to accommodate the actual level of funding. So in some respects there is already a mechanism in place to deal with the funding - the different funding levels for Medicaid. With respect to the facilities side of the Medicaid program, it is governed by federal law. There is a per day rate that is subject to federal law that assures efficient operation of the facilities. So again, the belief is that proration language, as provided in Senate Bill 377 would not affect that program as well. One of the two memos that I am getting for you speaks to that part of the -- and provided by Kim Busch who is in charge of that program in HESS. "The other area within HESS is a little more problematic and it deals with public assistance, both adult public assistance and Families with Dependent Children Program. The belief is that this change would not affect those programs either, again, because of federal law. However, part of the challenge may be the fact that there are federal floors that govern those programs. So to the extent that we are providing money in excess of that federal floor, it could be argued that we could prorate downward to the federal floor. However, the difficulty is that there is a variance among recipients of how much is being received. Allow me to use a hypothetical and then allow me to remind you that I'm speaking to the best of my knowledge, but, for example, if the floor was $1 and there were recipients receiving anywhere from $1.05 up to $2, if the proration were 10 cents, for instance, the person at $1.05 is only going to drop to $1 because that's the floor, whereas other who are at $1.10 or higher would lose 10 cents. So then you run into some potentially equal protection problems. So, as I thought through it, and perhaps the most you could do, would be the minimum -- the proration that of the minimum amount available. So, if in that example, if it was short funded, the maximum extent to which we could lower payments would be the 5 cents. I'm not -- I can't tell you that I've captured this entirely for you but we also have a memo that will speak to the public assistance point. But, again, the position seems to be that given that federal law is applicable may not be impacted by this legislation. "Another point that emerged over the last couple of days is more of an administrative and implementation problem. The way the statute is written, the administration needs to make an analysis of how much -- how many recipients there are, what the level of the payments should be and whether we have adequate funds and to the extent that we determine it would be short, we would prorate. Situation could arise that at the end of the first six months, we find out that we actually have some money left over, argument -- a the feeling is that on the one hand you could merely roll that money forward and in your analysis for the next six month window, or the argument might be made that you need to actually refund or provide a bonus to the recipients from that first six months. I suspect that we'd probably have to do the latter because it's not -- those who are receiving during the first six months wouldn't necessarily also be receiving in the next six months. So, if our calculations were wrong at the outset and there was money left over that suggests that everyone during that six month period should have been receiving more, we probably need to provide a check to those folks. Again, we're sort of work -- wrestling through this. I apologize that Shelby Stastny or some of the -- thank you -- some of the commissioners from the appropriate departments weren't reachable on this short of notice, but I hope I have answered the question to your satisfaction. I'll be happy to answer any questions that you have. These are the two memos that I referred to. As I said one relates to public assistance and the other to medical assistance. I'll distribute those." CHAIRMAN VEZEY: "Thank you, Mr. Elim." REPRESENTATIVE B. DAVIS: "Mr. Chairman." CHAIRMAN VEZEY: "Representative Davis, I'm sorry." Number 470 REPRESENTATIVE B. DAVIS: "That was a concern that you did not address. I know you talked about the foundation formula. There was concern about transportation, pupil transportation, food, and some other areas that would be prorated and how it would be done. There was some information to come to us pertaining to the regulations that's been used. Do you have any information from DOE on how they handled that when there was a shortfall of money?" MR. ELIM: "Mr. Chair, Representative Davis, I did reach Commissioner Covey moments ago and he had indicated that it was his understanding that their programs are already governed by proration language. I know specifically there is a section AS 14.17.225 provides that for some of the programs administered by Department of Education. The question that you have asked I'm not entirely certain of, because they run a number of different programs within the department, but the commissioner was of the mind that all their pro -- that they would not be affected by this provision. He was going to be checking with Duane Guiley who would be more intimately familiar with it and try to get back to me and I will share that with you as soon as I know the answer." REPRESENTATIVE B. DAVIS: "Alright, thank you." CHAIRMAN VEZEY: "Thank you, Mr. Elim. I would comment that this meeting has been noticed for more than forty-eight hours and the fact that the agency people haven't chosen to be here is their own choice. Are there questions of Mr. Elim? Representative Ulmer." Number 494 REPRESENTATIVE ULMER: "Mr. Chairman, the memo that we just received dated May 5, 1994, from (indiscernible) complicated questions which we cannot answer today regarding how this would actually work, but the very bottom of the first page, Mr. Chairman, talks about -- let's see the last sentence `in no case could reductions be imposed in the July 1st effective date of the bill.' As I read the version of the bill that we have in front of us, it has an immediate effective date which makes the situation actually even worse for the questions that need to be answered. So what's coming to my mind, I guess what I'm thinking about is a delayed effective date for Section 7 that would give the agencies time to not only figure out the federal implications, but also give them time to implement regulations -- to adopt the regulations which will govern how they're going to do this. So what I'm thinking about is another effective date section that we would add to our CS that would give an effective date to Section 7 to say, I don't know, like September 1, 1994, instead of immediate like the rest of the bill. I would ask Raga to comment on that, if he cares to." MR. ELIM: "Thank you, Mr. Chairman, Representative Ulmer. In our discussions, the issue which you've highlighted has emerged as a source of genuine concern by the department about their ability to implement this in such short notice. So the administration would welcome such a change." Number 521 REPRESENTATIVE ULMER: "Mr. Chairman, I'll move that we add a specific effective date for this section. So we'd add a new Section 12 on page 8, and it would be `Section 7 takes effect September 1, 1994." CHAIRMAN VEZEY: "Couldn't hear the date." REPRESENTATIVE ULMER: "September 1, 1994, or I guess October 1 is the date that Curtis Lomas memo references so... My motion is, add a new Section 12 on page 8 on line 10 that would say, `Section 7 takes effect October 1, 1994.'" CHAIRMAN VEZEY: "Does everybody understand the proposed amendment? I would read it back as saying, `Section 7 of this Act takes effect October 1, 1994.' That'll necessitate modifying Section 11. Representative Phillips." Number 533 REPRESENTATIVE PHILLIPS: "Mr. Chairman probably that should be Section 11 and Section 12 should be the last..." CHAIRMAN VEZEY: "I think we can let Leg Legal take care of that. Are there any questions about the amendment? Any discussion? Is there any opposition to the amendment from the State Affairs Committee? Hearing no opposition, it's adopted. Two amendments now I've got to incorporate. Further discussion? Do you have additional comments?" MR. ELIM: "No thank you, Mr. Chairman." CHAIRMAN VEZEY: "Questions of Mr. Elim. Thank you very much for your time." REPRESENTATIVE DAVIDSON: "Mr. Chairman." CHAIRMAN VEZEY: "Representative Davidson." REPRESENTATIVE DAVIDSON: "Thank you, Mr. Chairman. I just would raise the issue of the legislature giving any -- giving up any power of appropriation by this inclusion in the bill. I don't know who I would ask in that regard, but I think it was a question that the legislature should, in fact, examine. But I don't know who you have that could answer that kind of question." CHAIRMAN VEZEY: "Okay. Additional questions? Representative Bettye Davis." Number 549 REPRESENTATIVE B. DAVIS: "I don't have a question but since you've taken amendments, I am interested in another amendment to add a new subsection in this bill to say that this proration would not pertain to the longevity bonus." CHAIRMAN VEZEY: "You have suggested wording for that?" REPRESENTATIVE B. DAVIS: "Actually, that's what it would say and I don't have it written down, but it's very simple. It would just be a subsection F if you wanted to put it under (indiscernible) then it would not apply. I would let legal come up with the wording." CHAIRMAN VEZEY: "(Indiscernible) any objection? This section does not apply to the Longevity Bonus Program and they'll have a statute quote. Discussion? Seeing none would the -- is there more discussion here? Representative Davies." Number 564 REPRESENTATIVE DAVIES: "Just a comment that - that, you know, we have, last year put into effect a sequence of steps that will lead to the phasing out of the longevity bonus. And it seems to me that that already looks to eliminating that program. So I suggest that maybe that this would be sort of double jeopardy if it were -- is it were on that program, so maybe it makes sense to eliminate the proration effect on the Longevity Bonus Program." REPRESENTATIVE KOTT: "Mr. Chairman." CHAIRMAN VEZEY: "Representative Kott." REPRESENTATIVE KOTT: "Mr. Chairman, I might just add that we're not really reducing -- we didn't reduce anybody's longevity bonus checks last year, phase in or phase out depending on how you look at it. This would be, in essence, reducing individual checks which would be a first. (Indiscernible) continued, who got their $250 last year would fall under the category there as well anybody that were new entering into the program. So last year's phasing out of the program was really not a reduction. Those who currently got $250 still got $250 under the reduced phasing out of the program, whereby this is a little bit different (indiscernible) proposed the amendment. I don't feel that we can single out one of those programs and place it on a higher priority than any of the others that are listed here that could be possibly affected and will be." CHAIRMAN VEZEY: "Thank you. Further discussion? Seeing none, would the committee secretary call the roll?" JOSEPH EASAW: "Representative Fran Ulmer." REPRESENTATIVE ULMER: "Yes." JOSEPH EASAW: "Representative Bettye Davis." REPRESENTATIVE B. DAVIS: "Yes." JOSEPH EASAW: "Representative Harley Olberg." REPRESENTATIVE OLBERG: "No." JOSEPH EASAW: "Representative Pete Kott." REPRESENTATIVE KOTT: "No." JOSEPH EASAW: "Representative Jerry Sanders." REPRESENTATIVE SANDERS: "No." JOSEPH EASAW: "Representative Gary Davis." REPRESENTATIVE G. DAVIS: "No." JOSEPH EASAW: "Representative Al Vezey." CHAIRMAN VEZEY: "No, and the amendment fails. Further discussion on the pro rata? Representative John Davies." REPRESENTATIVE DAVIES: "Do we know -- we had some - a little bit of testimony with respect to AFDC and APA being federal programs. Could we get some testimony -- is there anybody in the room that can tell us at what point or how much the proration would have to reduce those programs before the, some kind of a federal floor would kick in?" CHAIRMAN VEZEY: "I certainly can't answer. It has been my experience with the health and social services folks that they could not answer that without considerable research. (Indiscernible) discussion? What is the pleasure of the committee? Would we like to stand at ease while we wait on some administration personnel to arrive? I'm sorry, Mr. Elim." MR. ELIM: "I don't believe is going to be any (indiscernible)." UNIDENTIFIED SPEAKER: "Could we perhaps have a motion and then we could all go beat up on Raga or something." CHAIRMAN VEZEY: "Yes, we most certainly could." Number 607 REPRESENTATIVE G. DAVIS: "Mr. Chairman." CHAIRMAN VEZEY: "Representative Gary Davis." REPRESENTATIVE G. DAVIS: "If we might, I might -- I noticed on some of this, I think from the note of some Department of Health and Social Services, or maybe it's not, anyway in one of these it seems that I read that the attorney general had an opinion on this section, if we might get a comment from him." CHAIRMAN VEZEY: "He can't stay out of the seat can he. Attorney General Botelho do you care to comment." Number 612 MR. BOTELHO: "I'll probably have opinions on a lot of things. (Indiscernible) board (indiscernible) drafted one, I've not had a chance to review it and so..." CHAIRMAN VEZEY: "Representative Ulmer." REPRESENTATIVE ULMER: "Well, Mr. Chairman, I don't want to delay the committee anymore. I think we've all spent as much time in this room as we probably can. Between now and when this bill may be debated on the floor I will try to get some additional answers. I am concerned about everything from pupil trans and school debt to a variety of other things and I don't think we quite have the answer to and, I guess, it's all of those questions that lead me to feel pretty strongly that this bill should not contain this section because of... However, this section should stand on its own as a separate piece of legislation. I think it's very confusing to people to have it be part of the oil and gas bill. I understand that at this point you were a -- feel as though it needs to stay in the committee substitute. I'm sure there will be a motion to take it off on the floor and, as I said, I will try to get some additional answers between now and then." CHAIRMAN VEZEY: "We'd appreciate that. Is there a motion from the State Affairs Committee? Representative Olberg." REPRESENTATIVE OLBERG: "Mr. Chairman, I'd move that we move Senate Bill 377, House Committee Substitute, Version I, as amended with individual recommendations." CHAIRMAN VEZEY: "And could we add the caveat with the attached zero fiscal note." REPRESENTATIVE OLBERG: "Yes, certainly." CHAIRMAN VEZEY: "Discussion? Would the committee secretary please call the roll?" JOSEPH EASAW: "Representative Al Vezey." CHAIRMAN VEZEY: "Yes." JOSEPH EASAW: "Representative Gary Davis." REPRESENTATIVE G. DAVIS: "Yes." JOSEPH EASAW: "Representative Jerry Sanders." REPRESENTATIVE SANDERS: "Yes." JOSEPH EASAW: "Representative Fran Ulmer." REPRESENTATIVE ULMER: "Yes." JOSEPH EASAW: "Representative Bettye Davis." REPRESENTATIVE B. DAVIS: "Yes." JOSEPH EASAW: "Representative Harley Olberg." REPRESENTATIVE OLBERG: "Yes." JOSEPH EASAW: "And Representative Pete Kott." REPRESENTATIVE KOTT: "I've always wanted to be a `no' by myself. No." Number 637 CHAIRMAN VEZEY: "And House Committee Substitute for Committee Substitute for Senate Bill #377 (State Affairs) as amended has passed out of the House State Affairs Committee. Is there further business to come before this committee this evening? Representative Davidson." REPRESENTATIVE DAVIDSON: "Thank you. I understood you to say there was a zero fiscal note attached to this. Is that correct?" CHAIRMAN VEZEY: "Yes." REPRESENTATIVE DAVIDSON: "After having the discussion of giving up perhaps tens of millions of state revenue, how could we have a zero fiscal note?" Number 644 CHAIRMAN VEZEY: "I can't answer that. That's what came over with it. If there is no further business to come before the House State Affairs Committee, we'll stand adjourned."