Legislature(1997 - 1998)

03/30/1998 03:20 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
    HOUSE LABOR AND COMMERCE STANDING COMMITTEE                                
                   March 30, 1998                                              
                     3:20 p.m.                                                 
                                                                               
                                                                               
MEMBERS PRESENT                                                                
                                                                               
Representative Norman Rokeberg, Chairman                                       
Representative John Cowdery, Vice Chairman                                     
Representative Jerry Sanders                                                   
Representative Joe Ryan                                                        
Representative Tom Brice                                                       
Representative Gene Kubina                                                     
                                                                               
MEMBERS ABSENT                                                                 
                                                                               
Representative Bill Hudson                                                     
                                                                               
OTHER HOUSE MEMBERS PRESENT                                                    
                                                                               
Representative Vic Kohring                                                     
                                                                               
COMMITTEE CALENDAR                                                             
                                                                               
HOUSE BILL NO. 400                                                             
"An Act combining parts of the Department of Commerce and Economic             
Development and parts of the Department of Community and Regional              
Affairs by transferring some of their duties to a new Department of            
Commerce and Rural Development; transferring some of the duties of             
the Department of Commerce and Economic Development and the                    
Department of Community and Regional Affairs to other existing                 
agencies; eliminating the Department of Commerce and Economic                  
Development and the Department of Community and Regional Affairs;              
relating to the Department of Commerce and Rural Development;                  
adjusting the membership of certain multi-member bodies to reflect             
the transfer of duties among departments and the elimination of                
departments; and providing for an effective date."                             
                                                                               
     - MOVED CSHB 400(L&C) OUT OF COMMITTEE                                    
                                                                               
* HOUSE BILL NO. 472                                                           
"An Act relating to apportionment of business income."                         
                                                                               
     - MOVED HB 472 OUT OF COMMITTEE                                           
                                                                               
(* First public hearing)                                                       
                                                                               
PREVIOUS ACTION                                                                
                                                                               
BILL: HB 400                                                                   
SHORT TITLE: DEPT OF COMMUNITY & ECONOMIC DEVELOPMENT                          
SPONSOR(S): REPRESENTATIVES(S) KOHRING, Austerman, Barnes,                     
Cowdery,                                                                       
Hodgins, Kelly, Mulder, Ogan, Ryan, Therriault, Vezey                          
                                                                               
Jrn-Date    Jrn-Page           Action                                          
02/12/98      2307     (H)  READ THE FIRST TIME - REFERRAL(S)                  
02/12/98      2308     (H)  L&C, FINANCE                                       
02/23/98               (H)  L&C AT  3:15 PM CAPITOL 17                         
02/23/98               (H)  MINUTE(L&C)                                        
02/25/98               (H)  L&C AT  3:15 PM CAPITOL 17                         
02/25/98               (H)  MINUTE(L&C)                                        
02/27/98               (H)  L&C AT  3:15 PM CAPITOL 17                         
02/27/98               (H)  MINUTE(L&C)                                        
03/06/98               (H)  L&C AT  3:15 PM CAPITOL 17                         
03/06/98               (H)  MINUTE(L&C)                                        
03/20/98               (H)  FIN AT  1:30 PM HOUSE FINANCE 519                  
03/21/98               (H)  L&C AT  1:00 PM CAPITOL 17                         
03/21/98               (H)  MINUTE(L&C)                                        
03/25/98               (H)  L&C AT  3:15 PM CAPITOL 17                         
03/25/98               (H)  MINUTE(L&C)                                        
03/27/98               (H)  FIN AT  1:30 PM HOUSE FINANCE 519                  
03/27/98               (H)  L&C AT  3:15 PM CAPITOL 17                         
                                                                               
BILL: HB 472                                                                   
SHORT TITLE: APPORTIONMENT OF BUSINESS INCOME                                  
SPONSOR(S): LABOR & COMMERCE BY REQUEST                                        
                                                                               
Jrn-Date    Jrn-Page           Action                                          
03/20/98      2682     (H)  READ THE FIRST TIME - REFERRAL(S)                  
03/20/98      2682     (H)  L&C, FINANCE                                       
03/30/98               (H)  L&C AT  3:15 PM CAPITOL 17                         
                                                                               
WITNESS REGISTER                                                               
                                                                               
JEFF BUSH, Deputy Commissioner                                                 
Department of Commerce and Economic Development                                
P.O. Box 110800                                                                
Juneau, Alaska 99811-0800                                                      
Telephone:  (907) 465-2500                                                     
POSITION STATEMENT:  Presented revised fiscal note to proposed                 
                     CS, Version F, for HB 400.                                
                                                                               
JOE KYLE, Executive Director                                                   
Alaska Steamship Association                                                   
234 Gold Street                                                                
Juneau, Alaska 99801                                                           
Telephone:  (907) 586-3107                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
SHERMAN ERNOUF, Special Assistant                                              
   to Mayor Rick Mystrom                                                       
Municipality of Anchorage                                                      
632 West Sixth Avenue, Suite 840                                               
Anchorage, Alaska 99501                                                        
Telephone:  (907) 343-4044                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
ERNIE HALL, Chairman                                                           
Board of Directors                                                             
Anchorage Economic Development Corporation                                     
144 East Potter Drive                                                          
Anchorage, Alaska 99518                                                        
Telephone:  (907) 562-2257                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
ROSEMARY HAGEVIG, Executive Board Member                                       
Southeast Conference                                                           
P.O. Box 240423                                                                
Douglas, Alaska 99824                                                          
Telephone:  (907) 364-2154                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
CHARLOTTE MacCAY, Vice President                                               
Council of Alaska Producers                                                    
1133 West 15th Avenue                                                          
Anchorage, Alaska 99501                                                        
Telephone:  (907) 272-2117                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
PAM LA BOLLE, President                                                        
Alaska State Chamber of Commerce                                               
217 Second Street, Suite 174                                                   
Juneau, Alaska 99801                                                           
Telephone:  (907) 586-2323                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
GREG CHAMPION, General Manager                                                 
Sheraton Anchorage Hotel and                                                   
   Inter-Alaska Hotels, Incorporated                                           
401 East Sixth Avenue                                                          
Anchorage, Alaska 99501                                                        
Telephone:  (907) 276-8700                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
BOB STILES, President                                                          
DRven Corporation                                                              
711 H street, Suite 600                                                        
Anchorage, Alaska 99501                                                        
Telephone:  (907) 276-6868                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
TINA LINDGREN, Executive Director                                              
Alaska Visitors Association                                                    
3201 "C" Street, Suite 403                                                     
Anchorage, Alaska 99503                                                        
Telephone:  (907) 561-5733                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
RICK LAUBER, Lobbyist                                                          
   for Pacific Seafood Processors Association                                  
321 Highland Drive                                                             
Juneau, Alaska 99801                                                           
Telephone:  (907) 586-6366                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
BILL ELANDER, President and                                                    
   Chief Executive Officer                                                     
Anchorage Convention and Visitors Bureau                                       
524 West Fourth Avenue                                                         
Anchorage, Alaska 99501                                                        
Telephone:  (907) 276-4118                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
BOB SOUTHALL, General Manager                                                  
Anchorage Hilton Hotel;                                                        
President, Alaska Hotel Motel Association                                      
500 West Third Avenue                                                          
Anchorage, Alaska 99501                                                        
Telephone:  (907) 265-7118                                                     
POSITION STATEMENT:  Testified in support of HB 472.                           
                                                                               
DEBORAH VOGT, Deputy Commissioner                                              
Department of Revenue                                                          
P.O. Box 110400                                                                
Juneau, Alaska 99811-0400                                                      
Telephone:  (907) 465-2300                                                     
POSITION STATEMENT:  Testified on HB 472.                                      
                                                                               
SUSAN BURKE, Attorney for the                                                  
   Northwest Cruise Ship Association                                           
424 North Franklin Street                                                      
Juneau, Alaska 99801                                                           
Telephone:  (907) 586-2777                                                     
POSITION STATEMENT:  Testified on HB 472.                                      
                                                                               
ACTION NARRATIVE                                                               
                                                                               
TAPE 98-40, SIDE A                                                             
Number 0001                                                                    
                                                                               
CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce                   
Standing Committee meeting to order at 3:20 p.m.  Members present              
at the call to order were Representatives Rokeberg, Cowdery,                   
Sanders, Ryan and Kubina.  Representative Brice arrived at                     
approximately 3:25 p.m.                                                        
                                                                               
HB 400 - DEPT OF COMMUNITY & ECONOMIC DEVELOPMENT                              
                                                                               
Number 0035                                                                    
                                                                               
CHAIRMAN ROKEBERG announced the committee's first order of business            
was HB 400, "An Act combining parts of the Department of Commerce              
and Economic Development and parts of the Department of Community              
and Regional Affairs by transferring some of their duties to a new             
Department of Commerce and Rural Development; transferring some of             
the duties of the Department of Commerce and Economic Development              
and the Department of Community and Regional Affairs to other                  
existing agencies; eliminating the Department of Commerce and                  
Economic Development and the Department of Community and Regional              
Affairs; relating to the Department of Commerce and Rural                      
Development; adjusting the membership of certain multi-member                  
bodies to reflect the transfer of duties among departments and the             
elimination of departments; and providing for an effective date."              
                                                                               
Number 0060                                                                    
                                                                               
REPRESENTATIVE JOHN COWDERY made a motion to adopt the proposed                
committee substitute for HB 400, labeled 0-LS1375\F, Lauterbach,               
dated 3/23/98.                                                                 
                                                                               
Number 0090                                                                    
                                                                               
CHAIRMAN ROKEBERG asked if there were any objections.  Hearing                 
none, Version F was before the committee.                                      
                                                                               
REPRESENTATIVE COWDERY explained Version F as chairman of the                  
subcommittee on HB 400, stating the subcommittee had met with the              
bill sponsor and addressed a number of the committee's concerns.               
He noted a primary concern was the $1.6 million fiscal note                    
attached to the original bill version by the Department of Commerce            
and Economic Development (DCED).  After the subcommittee's                     
discussions with the Administration and DCED regarding the staff               
relocations necessary under the bill, the bill sponsor worked with             
Representative Cowdery's office to develop what they believe is "a             
more realistic financial view of the merger."  Representative                  
Cowdery said the subcommittee's findings are expressed in the                  
fiscal notes before the committee; it concluded the total cost of              
the necessary relocations would be $200,000 or less.                           
Representative Cowdery said he believes the long-term savings of up            
to $1 million per year offered by the merger clearly justifies the             
$200,000 overhead.  Representative Cowdery stated the subcommittee             
believes Version F, the proposed committee substitute, is ready to             
be moved to the next committee of referral.                                    
                                                                               
Number 0203                                                                    
                                                                               
REPRESENTATIVE GENE KUBINA confirmed the fiscal note approved by               
Representative Kohring is the fiscal note the committee is dealing             
with.                                                                          
                                                                               
Number 0220                                                                    
                                                                               
[IT APPEARS CHAIRMAN ROKEBERG CALLED A BRIEF AT EASE AT THIS POINT             
FROM TAPED TESTIMONY BUT THIS WAS NOT INDICATED IN THE TAPE LOG                
NOTES]                                                                         
                                                                               
CHAIRMAN ROKEBERG indicated the fiscal note Representative Kubina              
referred to was before the committee, noting HB 400 had a further              
referral to the House Finance Standing Committee.                              
                                                                               
REPRESENTATIVE KUBINA said he would like to see the department's               
fiscal note, noting he did not have a copy.                                    
                                                                               
CHAIRMAN ROKEBERG requested Representative Kubina be provided a                
copy of the original departmental fiscal note.                                 
                                                                               
Number 0269                                                                    
                                                                               
CHAIRMAN ROKEBERG called a brief at ease at 3:23 p.m.  The                     
committee came back to order at 3:24 p.m. [NOTE: THE TAPE WAS                  
RESTARTED SLIGHTLY AFTER THE COMMITTEE CAME BACK TO ORDER]                     
                                                                               
CHAIRMAN ROKEBERG stated "... had a fiscal note from the                       
department.  Mr. Bush, you signed up to testify.  Would you like to            
explain this fiscal note, please?"                                             
                                                                               
Number 0270                                                                    
                                                                               
JEFF BUSH, Deputy Commissioner, Department of Commerce and Economic            
Development, came forward to testify.  He said the department had              
updated the fiscal note based on the work draft of the proposed                
committee substitute which had been provided to the department.                
Mr. Bush said the changes were fairly minor, and some were based on            
technical changes.  A significant change in the proposed committee             
substitute is that "international trade" would go to the Office of             
the Governor, rather remaining in the new department.  Mr. Bush                
said that reflects a slight savings because the four people doing              
international trade would not have to be relocated with the new                
department, they would remain with the governor's office, going to             
the Bank of America building [5 West Seventh Avenue in Anchorage,              
to be renamed the Robert B. Atwood Building].  He stated DCED has              
also provided worksheets attached to the fiscal note, pages 6 and              
7, answering some of the earlier questions about how the moving                
costs were calculated.  Mr. Bush indicated the calculation by the              
Department of Administration of the $6,100 per person moving cost              
had been explained in a letter already provided to the committee.              
He said page 7 of the fiscal note showed how the $125,000 data                 
processing costs for the transfer were calculated.  He noted the               
$22,500 cost for the new child care office and $23,500 for the new             
Job Training Partnership Office (JTPO).  Mr. Bush explained the two            
bottom sections showed the two options of switching the Department             
of Community and Regional Affairs (DCRA) to DCED's computer system             
DCED (DCED Option 1, $74,220) or vice versa (DCED Option 2,                    
$77,500).  He indicated these were relatively rough estimates and              
noted the total data processing expenses would be approximately                
$125,000.  Mr. Bush noted one less administrative service staff                
person would be moved due to an error in the original calculations,            
and he indicated the rest of the changes were fairly small and of              
that nature.                                                                   
                                                                               
Number 0484                                                                    
                                                                               
CHAIRMAN ROKEBERG recommended that the committee move both fiscal              
notes, asking if there were any questions for Mr. Bush.  Hearing               
none, Chairman Rokeberg stated the public hearing was closed and               
asked if there was any discussion among the committee members.  He             
commented, "I'd like to -- (indisc.) fiscal notes."  Noting the                
subcommittee's work and discussions in this area, Chairman Rokeberg            
said he considered the $1.6 million moving costs, 260 positions, to            
be absolutely contrary to the understanding of the committee and               
the instructions from the subcommittee on the bill.  He stated he              
would say the sponsor's fiscal note has greater credibility than               
the department's fiscal note because the subcommittee's work                   
indicates there is a minimal need for any physical relocation of               
office premises, the nature of the department's fiscal note.                   
Chairman Rokeberg commented he thought that would stand up and                 
indicated the House Finance Standing Committee could address it                
with appropriate intent language.  He said he didn't think these               
movements were necessary, noting much of the moving would take                 
place over a period of years as lease expirations naturally                    
occurred.  He said the subcommittee testimony tapes were available             
as part of the public record [House Labor and Commerce Standing                
Committee subcommittee on HB 400 met March 21, 1998].  Chairman                
Rokeberg stated he would like a motion on HB 400.                              
                                                                               
Number 0617                                                                    
                                                                               
REPRESENTATIVE COWDERY made a motion to move the proposed committee            
substitute for HB 400, Version F, labeled 0-LS1375\F, Lauterbach,              
dated 3/23/98, to the next committee of referral with the                      
accompanying two fiscal notes and individual recommendations.                  
                                                                               
CHAIRMAN ROKEBERG asked if there were any objections.                          
                                                                               
REPRESENTATIVE TOM BRICE objected to the motion.  He stated all HB
400 does is make small government into big, noting that was the                
reason for his objection.                                                      
                                                                               
CHAIRMAN ROKEBERG asked if there were further comments.                        
                                                                               
Number 0688                                                                    
                                                                               
CHAIRMAN ROKEBERG called a brief at ease at 3:29 p.m.  The                     
committee came back to order at 3:30 p.m.                                      
                                                                               
REPRESENTATIVE KUBINA stated he would not object to moving a bill              
with fiscal implications to the House Finance Standing Committee,              
indicating the issue might as well be decided in that committee.               
                                                                               
CHAIRMAN ROKEBERG asked Representative Brice if he wanted to                   
maintain his objection.                                                        
                                                                               
REPRESENTATIVE BRICE answered in the affirmative.                              
                                                                               
A roll call vote was taken.  Representatives Rokeberg, Cowdery,                
Sanders, Ryan and Kubina voted in favor of moving the proposed                 
committee substitute.  Representative Brice voted against it.                  
Representative Hudson was absent.  Therefore, CSHB 400(L&C) moved              
from the House Labor and Commerce Standing Committee by a vote of              
5-1.                                                                           
                                                                               
HB 472 - APPORTIONMENT OF BUSINESS INCOME                                      
                                                                               
Number 0783                                                                    
                                                                               
CHAIRMAN ROKEBERG announced the committee's next item of business              
was HB 472, "An Act relating to apportionment of business income."             
Chairman Rokeberg commented that there were a number of people who             
wished to testify, noting he would present a brief outline of this             
legislation's importance.  Chairman Rokeberg said HB 472 introduced            
as a committee bill at the request of a number of the affected                 
industries in Alaska.  He said it results from an Alaska Supreme               
Court ruling in February 20, 1998 ["1995" stated on tape] case of              
the State of Alaska v. OSG Bulk Ships, Inc.  The ruling was that               
Alaska Corporate Net Income Tax Act (ANITA) applies to the income              
of foreign-flagged ships and aircraft bringing goods and passengers            
to Alaska.  Chairman Rokeberg said he believed this tax would have             
a very chilling effect on the business activity and international              
trade of Alaska, stating, "It exposes the myth that we are open for            
business."  He indicated that if they allowed the taxation ability             
granted by this court decision to stand, it would have a very                  
negative effect on Alaska's commerce.  He referred to the court's              
finding regarding the legislature's adoption by reference of the               
Internal Revenue Code (IRC), noting the statute said that Sections             
1 through 1399 were adopted by reference unless otherwise excepted             
to or modified by the statute.  He noted the court looked at                   
legislative history on one of three issues but he could see                    
basically no substantive history in the record, although he said               
they are still doing some research.                                            
                                                                               
Number 0940                                                                    
                                                                               
CHAIRMAN ROKEBERG said he believed the legislature meant what it               
did, it adopted the IRC "by the number," noting he would call it               
"black letter law."  He stated that economic development, job                  
creation and the economic health of the state would be very                    
severely impacted without the passage of HB 472 and he expected to             
hear that in the testimony.  Chairman Rokeberg said he was very                
concerned about this important issue and he looked forward to                  
hearing the Administrations's testimony and possible position.                 
Because of the tax on foreign-owned, foreign-flagged vessels and               
aircraft, this would particularly impact the export of all natural             
resources from the state.  It also could affect the air carriers               
and passengers coming into the state, particularly into Anchorage              
International Airport.  Without this particular Internal Revenue               
Code ["Service" stated on tape] Alaska could potentially face                  
retaliation against what is called a "sub-national taxing entity"              
because of the treaties in place between the United States (US) and            
foreign governments, particularly Japan.  He commented that Alaska             
would be the only state in the union with this ability to tax these            
foreign businesses.  He noted the large number of businesses and               
groups with concerns who supported HB 472, noting letters provided             
to the committee members.  He commented on the rapid response to               
this issue.  He also drew the committee's attention to letters in              
the bill packet regarding similar taxes in New York and New Jersey             
which were withdrawn in the face of federal opposition.  He also               
noted a very exhaustive report and critical analysis by Dr. David              
Reaume of Alaska Economics, Incorporated, on the Alaska tax and                
foreign-flagged ships and aircraft.  He noted copies of the court              
case and copies of the federal law had also been provided.                     
The sponsor statement reads:                                                   
                                                                               
     This bill originated at the request of the industries                     
     effected by the recent Alaska Supreme Court ruling, State                 
     of Alaska vs OSG BULK ships, Inc., dated February 20,                     
     1998, that the Alaska Corporation Net Income Tax                          
     ("ANITA") applies to the income of foreign flagged ships                  
     and aircraft bringing goods and passengers to and from                    
     Alaska.                                                                   
                                                                               
     This new tax burden will have a chilling effect on                        
     commercial development, international trade and job                       
     creation in this state.  It will slam the door on the                     
     myth that "Alaska is open for Business".  If the                          
     Department of Revenue implements this new tax, Alaska                     
     would be the only state to have such a tax.                               
                                                                               
     The court held that the exemption from taxation granted                   
     in 26 U.S.C. Section 883 "is impliedly excepted to [or                    
     modified] by the ANITA".  The Legislature adopted Section                 
     883 when it enacted AS 43.20.021(a) "Sections 26 U.S.C.                   
     1-1399 and 6001-7872 (Internal Revenue code), as amended,                 
     are adopted by reference...", (See the bill.).  The Court                 
     found otherwise.                                                          
                                                                               
     The issue for the Legislature and the Administration can                  
     be posited as:  Should the public policy of the State of                  
     Alaska be to tax the net income of foreign flagged/owned                  
     ships, aircraft, railroad rolling stock and communication                 
     satellites contrary to the tax law of the United States                   
     and its agreements with foreign governments engaged in                    
     commerce in our state?                                                    
                                                                               
     A strong indication that the Legislature intended to                      
     adopt Section 883 without exception is evident by the                     
     rejection of legislation sought by the Department of                      
     Revenue in 1991-1992.  This legislation specifically                      
     stated that Section 883 was not adopted in Alaska tax                     
     law.                                                                      
                                                                               
     Commerce of the state of Alaska will be severely impacted                 
     without passage of HB 472.  The following business                        
     sectors would be directly taxed; subject to foreign                       
     retaliation or secondarily effected:  international air                   
     cargo, air couriers, and airlines; fishers and seafood                    
     processors; mining and coal companies; cruiseship lines                   
     and tourism; timber and wood products; manufacturing                      
     firms; and oil and LNG [liquefied natural gas] exports.                   
                                                                               
     The imposition of a new business tax, for an as yet                       
     unknown amount, will have a detrimental effect on the                     
     business and employment of Alaskans.                                      
                                                                               
Number 1190                                                                    
                                                                               
REPRESENTATIVE JOE RYAN asked if this was not the same thing that              
happened with Barclays Bank PLC and the state of California where              
they were taxing a proportional share of income that the bank made             
in California which was against a reciprocal tax agreement Great               
Britain had with the US.                                                       
                                                                               
CHAIRMAN ROKEBERG stated he was not familiar with that case and                
noted perhaps one of the witnesses could answer more appropriately.            
                                                                               
Number 1310                                                                    
                                                                               
JOE KYLE, Executive Director, Alaska Steamship Association (ASA),              
came forward to testify support of HB 472.  He noted the                       
association is comprised of a broad-based group of marine                      
transportation companies operating in Alaska and their agents.  He             
said these companies move timber, mining, fisheries and petroleum              
products, as well as cruise ship passengers, between Alaska and                
overseas ports.  He referred to the February 20, 1998 supreme court            
ruling previously mentioned which stated that an exemption from                
corporate income tax for foreign international air and sea carriers            
existing at the federal level in IRC Section 883 no longer applies             
in Alaska.  He discussed the case in some depth, indicating income             
earned overseas is exempted from state taxes.  In reversing the                
ruling the justice said this would be inconsistent with Alaska's               
apportionment system.  Mr Kyle noted the other 49 states use a                 
"sourcing" methodology.  He said the ASA's membership would be                 
severely affected by this new tax, noting they have already seen a             
41 percent decline in the number of waterborne carriers whom their             
members are affiliated with calling in Alaska ports over the past              
several years.  He thinks most of this decline has come from                   
reduced ship calls in the timber and fishing industries.  He said              
with the current economic crisis in Asia, Asian shipping companies             
are barely surviving and the markets they service are extremely                
depressed.  He indicated he thought international shipping                     
companies would probably raise their Alaskan freight rates because             
of this tax, noting this would make Alaskan products, especially               
fish and timber, less competitive in already depressed markets.  He            
indicated associated industries such as longshoring and port                   
services would also be negatively affected, and he noted the                   
possibility of retaliatory action against domestic carriers                    
operating overseas.  He mentioned the three other states                       
(California, New Jersey and New York) which rescinded actions to               
impose similar taxes.                                                          
                                                                               
REPRESENTATIVE COWDERY confirmed with Mr. Kyle that Japan did not              
tax Alaskan liquefied natural gas (LNG).                                       
                                                                               
MR. KYLE said the tax in question would be on an American carrier              
operating in Japan, Federal Express Corporation for example, noting            
he thinks LNG is shipped to Japan on foreign carriers.                         
                                                                               
REPRESENTATIVE KUBINA commented that Alaskan oil is shipped on                 
American vessels, and another question would be whether Alaska                 
Airlines flights to the former Soviet Union are being taxed.                   
                                                                               
Number 1550                                                                    
                                                                               
MR. KYLE said he understands that there is something of an                     
international protocol in effect where all the countries have                  
agreed not to let local jurisdictions tax internationally-operating            
carriers.  He said that is the fear of this type of tax, that if a             
local, in this case state, tax is enacted on a foreign carrier                 
operating in that jurisdiction then it would invite a reciprocal               
tax in the other country on US-owned companies operating in that               
country, in that local jurisdiction.                                           
                                                                               
REPRESENTATIVE KUBINA asked if the Department of Revenue (DOR) had             
put something out which said it intends to do this, or is if was               
this an attempt to "nip it in the bud" because of the court case.              
                                                                               
MR. KYLE said they were primarily reacting to the Alaska Supreme               
Court case, indicating they expect the DOR to apply this new                   
taxation ability as broadly as it can.                                         
                                                                               
CHAIRMAN ROKEBERG noted the committee looked forward to DOR's                  
response.  He said there has been a legal request for a rehearing,             
noting he thinks that means there has been a stay.                             
                                                                               
REPRESENTATIVE KUBINA indicated he would like to hear if any Alaska            
businesses were being attacked.                                                
                                                                               
CHAIRMAN ROKEBERG noted it was his understanding the OSG Bulk                  
Ships, Incorporated, had foreign-flagged vessels participating in              
the Valdez trade as a only temporary measure, indicating it was the            
nature of the ownership of the vessel itself.  He said the Jones               
(ph) Act mitigated against the use of the Valdez trade to the other            
49 states and the export waiver requirement was on American-                   
bottomed ships also.  He noted he believed American vessels are                
taxed by the US government, not the other countries they visit, and            
that is the nature of the IRC Section 883 exemption.                           
                                                                               
REPRESENTATIVE RYAN mentioned the economic crisis in the Pacific               
Rim, commenting that the devalued Asian currencies make Alaska                 
products even more expensive.  He indicated the cost of Alaskan                
products would increase, becoming even less competitive, if                    
retaliatory taxes were imposed.                                                
                                                                               
Number 1707                                                                    
                                                                               
SHERMAN ERNOUF, Special Assistant to Mayor Rick Mystrom,                       
Municipality of Anchorage, testified next via teleconference from              
Anchorage on behalf of Mayor Mystrom in support of HB 472.  He                 
referred to Mayor Mystrom's letter, noting they are fully                      
supportive of HB 472.  He said the mayor continues to be very                  
concerned about economic development in Anchorage, and there is                
concern that economic development at the Port of Anchorage and                 
Anchorage International Airport could both be stifled without HB
472.                                                                           
                                                                               
REPRESENTATIVE KUBINA asked if the Municipality of Anchorage was               
willing to take any other position on ways to close state's fiscal             
gap such as income taxes, permanent fund, et cetera, so that                   
municipality's revenue sharing would not be cut any more.                      
                                                                               
MR. ERNOUF replied he did not think attacking foreign carriers was             
the way to do that, noting he was not really currently equipped to             
answer the question about the permanent fund.                                  
                                                                               
Number 1790                                                                    
                                                                               
ERNIE HALL, Chairman, Board of Directors, Anchorage Economic                   
Development Corporation (AEDC), testified next via teleconference              
from Anchorage in support of HB 472.  He discussed the recent court            
decision briefly.  He said the Alaska corporate income tax would be            
applied to past, present and future net operating income.  He said             
the state of Alaska depends on trade (including the export of oil              
and gas, seafood, timber and air cargo) and tourism as its                     
"principle economic engine."  He indicated the AEDC believed the               
negative impacts on Alaska's trade would be in far excess of any               
direct revenue obtained.                                                       
                                                                               
CHAIRMAN ROKEBERG asked how AEDC was funded.                                   
                                                                               
MR. HALL replied that the AEDC revenues came from the municipality             
and private individuals.  He said in excess of 50 percent came from            
private funding, and the state provided approximately $50,000                  
through the ARDOR Program out of AEDC's $1 million annual budget.              
                                                                               
Number 1881                                                                    
                                                                               
ROSEMARY HAGEVIG, Executive Board Member, Southeast Conference,                
came forward to testify next in Juneau in support of HB 472.  She              
explained that Southeast Conference is the regional economic and               
community development organization for Southeast Alaska and they               
follow all issues relating to timber, mining and tourism as these              
are the mainstays of the regions economy.  She said the members of             
the region's mayors and cruise ship industry representatives have              
been meeting for some time to look for solutions to mutual                     
problems.  She said they realized there was not a lot of data on               
the ratio of income to the municipalities as opposed to the                    
expenses so a study was commissioned from Southeast Conference.                
She cited this February 1998 McDowell Group, Incorporated, report,             
"Cruise Industry Impacts on Local Governments in Southeast Alaska,"            
she noted Southeast Alaskan municipalities collect approximately               
$10 million in annual revenues from the industry while incurring               
approximately $3 million in costs.  Ms. Hagevig commented that this            
does not include the total economic impact to the region, only the             
cost/revenue ratio by local governments and their relationship with            
the cruise ship industry.                                                      
                                                                               
Number 1987                                                                    
                                                                               
MS. HAGEVIG mentioned the City and Borough of Juneau has done more             
comprehensive studies in previous years.  She stated that the                  
Southeast Conference opposed imposition of the considered tax                  
because of the potential for adverse economic impact on Southeast              
Alaska's communities and people, noting the cost of a tax would be             
passed on to Alaskan shippers using foreign-flagged ships and                  
aircraft, making them less competitive.  She also indicated                    
potential reciprocal taxes could make the US less competitive in               
the global market.  Ms. Hagevig indicated the tax would adversely              
affect economic development in Southeast Alaska communities by                 
being applied proportionately to the length of time a cruise ship              
is in port and the number of ports of call.  She said the                      
conference is also concerned that the cruise ships would decrease              
the number of ports of call and time in port in response.  She                 
indicated the City and Borough of Sitka has experienced a                      
noticeable reduction in revenue because of variation in cruise ship            
scheduling.                                                                    
                                                                               
REPRESENTATIVE KUBINA asked if the conference had taken a position             
on how the state of Alaska should increase its revenues to pay its             
bills.                                                                         
                                                                               
MS. HAGEVIG said she did not think the Southeast Conference had a              
specific position on that issue.  She indicated, however, that                 
municipalities would look to state government for any decreased                
municipal revenues to pay for needed services, noting more and more            
responsibilities being passed to the local government level by the             
state.                                                                         
                                                                               
Number 2215                                                                    
                                                                               
CHARLOTTE MacCAY, Vice President, Council of Alaska Producers, came            
forward to testify next in support of HB 472.  She stated the                  
council is a membership of the large mine interests for the state              
of Alaska.  She indicated that the supreme court ruling would hurt             
Alaska's position in competitive world markets.  She mentioned the             
state's limited road system and the resulting difficulties mining              
companies in Alaska face already makes it difficult for mining                 
companies to produce their products at competitive rates.  She                 
indicated the tax would cause higher freight costs which would be              
passed on to producers and the council felt the ruling was not in              
agreement with the legislature's original intent.                              
                                                                               
CHAIRMAN ROKEBERG asked her what types of vessels were used in the             
export of Alaskan minerals by active Alaska mines, mentioning the              
Red Dog (ph) and Greens Creek mines, and asking her to comment on              
the Faro (ph) mine in Skagway.                                                 
                                                                               
MS. MacCAY replied she was not familiar with the Faro (ph) mine's              
shipping, but she said the Red Dog (ph) is currently "lightering"              
offshore so the ships don't actually come within the three-mile                
limit, so she is not sure how that would affect this tax.  She                 
noted the ships are all foreign-bottomed, and approximately half of            
the ore was exported to British Columbia and the rest went between             
Europe and Asia, depending on the year's market.  She said they                
expect to bring the ships into the dock and then would be within               
the tax structure.                                                             
                                                                               
CHAIRMAN ROKEBERG asked her about the flags of the ships they used             
now and contemplated using in the future.                                      
                                                                               
MS. MacCAY said they vary and indicated did not have the details               
with her.                                                                      
                                                                               
CHAIRMAN ROKEBERG asked about the effect of the ruling on other                
council members' use of shipping that might be affected by this                
legislation.                                                                   
                                                                               
MS. MacCAY indicated the entire industry was concerned and                     
companies were questioning whether they want to even consider doing            
business in the state if that is going to be a problem.                        
                                                                               
CHAIRMAN ROKEBERG asked if she could check on Skagway, mentioning              
a very large Alaska Industrial and Export Authority (AIDEA) loan               
and the closure of Faro (ph) mine.  He noted he wanted to know what            
type of bottoms had been used.                                                 
                                                                               
MS. MacCAY indicated she would provide the committee with a quick              
summary.                                                                       
                                                                               
Number 2349                                                                    
                                                                               
PAM LA BOLLE, President, Alaska State Chamber of Commerce, came                
forward to testify next in support of HB 472.  She stated the                  
chamber represents nearly 700 members who employ approximately                 
70,000 people.  She said the chamber speaks in support of HB 472,              
noting it did not support any new tax that is not part of an                   
overall long-range plan reviewed and supported by business.  Ms. La            
Bolle referred to the new tax allowed by the ruling as "ad hoc. "              
Noting low oil prices and the need for economic diversification,               
she said the tax could have a chilling effect on business interests            
because it impacts so many present and potential industries across             
the board.  She mentioned a proposed tax incentive bill for                    
investors building an LNG pipeline, and she said allowing this new             
tax decreed by the courts provides a disincentive for new and                  
existing businesses.  Mentioning that the tax has not been                     
established by legislative policy.  Ms. La Bolle commented that the            
DOR had tried and failed to gain support for the tax with a                    
previous legislature; the tax was not seen as being beneficial to              
economic development or in the state's best interest and she said              
it should not be allowed to stand by the court's "view of an                   
implication."  Ms. La Bolle stated that the new tax would increase             
transportation costs for Alaskans and directly and adversely affect            
many of the chambers members.  She noted other members would be                
affected indirectly.                                                           
                                                                               
REPRESENTATIVE KUBINA thanked Ms. La Bolle for not just saying "no"            
to just anything, noting he agreed with her statement about the                
necessity for an overall long-range plan for businesses.                       
                                                                               
Number 2349                                                                    
                                                                               
MS. LA BOLLE said, "Mr. Chairman, if I may ..." [TESTIMONY                     
INTERRUPTED BY TAPE CHANGE]                                                    
                                                                               
TAPE 98-40, SIDE B                                                             
Number 0001                                                                    
                                                                               
MS. LA BOLLE continued, "... the greatest benefit to the state is              
a positive environment for economic development because the                    
stronger our economy, the more business there is in the state is in            
the state, the more taxes that will be coming in."                             
                                                                               
Number 0031                                                                    
                                                                               
GREG CHAMPION, General Manager; Sheraton Anchorage Hotel and Inter-            
Alaska Hotels, Incorporated, testified next via teleconference from            
Anchorage in support of HB 472.  He stated Inter-Alaska Hotels,                
Incorporated, is a sister company to Hanjin International                      
Corporation, which is a foreign corporation and the parent company             
to Korean Airlines.  He noted his company has been doing business              
in Alaska since 1988 and has been involved a variety of different              
businesses including real property ownership, cargo and passenger              
flights, in-flight catering, laundry and linen cooperative, and the            
Sheraton Anchorage Hotel.  He said their Anchorage operation                   
accounts for over 350 full-time Alaskan employees.  He discussed               
some history of their business operation and Anchorage                         
International Airport about ten years to approximately 1987.  Mr.              
Champion noted Alaska lost almost every foreign carrier when air               
space over the former Soviet Union opened, and he indicated Alaska             
might lose more foreign carriers because of increasing taxes and               
landing fees.  He noted all twelve of the foreign carriers have                
other options besides stopping in Anchorage which is only a                    
technical stop, mentioning other possible locations.  Mr. Champion             
indicated the cost of doing business has caused companies to stay              
in Alaska, noting his company is looking to expand its Alaskan                 
business looking to the year 2000 and beyond, as long as Anchorage             
remains competitive economically.  He said Alaska would be unique              
if it enacted this tax, Alaska could be viewed as unfavorable place            
to do business by foreign countries, and he also mentioned the                 
possibility of retaliatory taxes.  He indicated he felt this would             
be a devastating blow to the economic growth Alaska has experience             
in the last couple of years and would have a drastic impact on all             
business in the state including tourism, natural resources and                 
business development.                                                          
                                                                               
CHAIRMAN ROKEBERG asked him if the US government and the Republic              
of Korea have treaty agreements which reciprocally exempt the                  
taxation of aircraft.                                                          
                                                                               
MR. CHAMPION answered in the affirmative.                                      
                                                                               
CHAIRMAN ROKEBERG asked if he could obtain a written copy for a                
committee.  He also asked if Mr. Champion thought Korea Airlines,              
with its significant Anchorage investments, would change its                   
Anchorage business plan and strategy if the tax was enacted.                   
                                                                               
MR. CHAMPION indicated his company would probably change locations             
if it would save money over the long term, noting air                          
transportation was the core business.  He provided his phone number            
to the committee:  (907) 343-3143.                                             
                                                                               
Number 0254                                                                    
                                                                               
BOB STILES, President, DRven Corporation, testified next via                   
teleconference from Anchorage.  He stated his corporation is                   
involved in the development and marketing of Alaska's coal                     
resources.  He noted he was an Alaskan corporate income tax payer.             
He said that, with the exception of North Slope oil, all seaborne              
Alaskan exports to foreign destinations move in foreign-flagged                
vessels owned by non-US corporations.  He indicated that without               
the restoration of the IRC Section 883 exemption the worldwide net             
income of the non-US corporate owners of these foreign-flagged                 
vessels would be subject to taxation under ANITA.  He indicated                
Alaska would be unique in imposing such a tax.   While the federal             
government cannot dictate state taxation policies, he said such a              
new tax would violate federal trade treaties with Alaska's most                
important trading partner, Japan.  He indicated the possibility of             
retaliatory taxes existed.  He said the Alaska consumer of imported            
goods and the Alaska producer of exported goods would pay for this             
new tax in higher freight rates.  He indicated additional                      
collection costs could nullify any new revenues and adversely                  
impact existing or developing resource export agreements.  He                  
questions whether, in enacting or modifying ANITA, it was ever the             
legislature's intent to attempt to impose a corporate income tax on            
foreign owners of foreign-flagged vessels and foreign-registered               
aircraft.  He said he believes the court had no idea of the                    
potential consequences of its opinion, however, it was in effect               
setting policy rather than implementing law.  He spoke in strong               
support for HB 472, indicating Alaska's reputation would be damaged            
and its economy negatively impacted by imposition of the this tax.             
Mr. Stiles indicated the legislature needed to take decisive action            
to minimize damage to Alaska's reputation as a business location,              
referring to comments about Internet publicity on this issue by an             
assistant commissioner of the DOR.                                             
                                                                               
CHAIRMAN ROKEBERG asked about the types of vessels Usibelli Coal               
Mine used to export its product.                                               
                                                                               
MR. STILES answered that it used all foreign-flagged vessels.                  
                                                                               
Number 0430                                                                    
                                                                               
TINA LINDGREN, Executive Director, Alaska Visitors Association                 
(AVA), testified next via teleconference from Anchorage in support             
of HB 472.  She noted the AVA's membership collectively employs                
25,000 Alaskans.  She said that HB 472 clarifies that IRC Section              
883 has not been modified, noting she did not think she could                  
improve on previous testimony.  She indicated the tax would have               
negative effects on Alaska's ability to compete globally, and she              
noted that even small losses, like the loss of single air carrier              
or a cruise ship port of call, would have statewide ramifications,             
and she briefly discussed this.                                                
                                                                               
CHAIRMAN ROKEBERG noted he hoped the AVA would make this a top                 
agenda item at the AVA's upcoming Juneau convention.                           
                                                                               
Number 0560                                                                    
                                                                               
RICK LAUBER, Lobbyist for Pacific Seafood Processors Association,              
came forward to testify next in Juneau in support of HB 472.  He               
said any tax on transporters of their products would be an indirect            
tax on their products and a direct "pass-through" to his group.  He            
noted that commercial fishermen and seafood processors are already             
heavily taxed, noting the state government's fishery business tax,             
the "raw fish tax," of from 3 to 6 percent.  He mentioned the local            
governments' sales taxes on seafood products of up to 3 percent; he            
also mentioned the seafood marketing tax, the "salmon tax," and the            
salmon fisheries enhancement tax, the marine fuel tax, et cetera.              
He said the industry is already in competition with other protein              
products, with farmed salmon receiving the most attention and has              
significantly eroded the industry's markets.  He indicated this new            
tax would negatively affect the industry's competitiveness and                 
contribute to its decline in domestic and world markets.  Mr.                  
Lauber stated this tax could encourage more at-sea factory trawlers            
to transport their product directly to foreign ports, avoiding both            
the Alaska landing tax and the new tax, which would not only                   
disadvantage Alaskan fishermen and processors competitively, but               
also could cause the state to lose significant revenue.  He                    
indicated this could also negatively impact current or potential               
markets for value-added products, mentioning the Anchorage cold                
storage facility.  He indicated the seafood industry was already in            
weak situation and this was an especially bad time for a new tax.              
                                                                               
CHAIRMAN ROKEBERG noted Mr. Lauber mentioned an impact to state                
revenue as it relates to the Alaska landing tax and asked him to               
explain.                                                                       
                                                                               
MR. LAUBER provided some background information.  He said the                  
shore-based processors pay a business license tax which is a                   
percentage ranging from 3 to 6 percent on the processor's exvessel             
purchases, and is usually called the "raw fish tax."  A few years              
ago the legislature enacted a landing tax which imposes a 3.3                  
percent tax on processed fisheries products landed in the state.               
He indicated there are a number of at-sea processors who have taken            
their product directly to foreign ports and are able to avoid the              
tax by not delivering their product to Alaskan ports, although                 
there are disadvantages including loss of fishing time. He                     
indicated any increases to transportation fees to move product out             
of Alaska to foreign ports on foreign trampers could increase the              
amount of at-sea processors fishing in the 200-mile limit                      
delivering their product directly to foreign ports, noting the                 
state would lose that landing tax revenue.  There was some                     
discussion about this fishing system and reference to US Senator               
Ted Stevens.                                                                   
                                                                               
Number 0990                                                                    
                                                                               
BILL ELANDER, President and Chief Executive Officer, Anchorage                 
Convention and Visitors Bureau (ACVB), testified next via                      
teleconference from Anchorage in support of HB 472.  He indicated              
he agreed with previous testimony and referred to his March 24                 
letter and a letter from the Cook Inlet Book Company, Incorporated,            
an ACVB member.  He noted the ACVB has over 1,375 business members.            
He drew on his experience working with government and foreign                  
delegations and he indicated Alaska's openness to business has                 
resulted in the entry of foreign businesses.  He mentioned the                 
Alyeska Resort and the Korean Airlines as examples, discussing the             
Jones (ph) Act and Korean passengers deplaning in Anchorage.  He               
commented the "milestone" of plans by Northwest Airlines for round-            
trip passenger service from Tokyo, Japan to Anchorage beginning                
June 17, indicating there were great future opportunities, and that            
there would be negative ramifications for Alaska if it did not                 
compete effectively in the growing global economy.                             
                                                                               
CHAIRMAN ROKEBERG indicated Northwest Airlines has been an                     
important of the Anchorage International Airport development over              
the years, noting he had been on the first Boeing 377 Stratocruiser            
flight by Northwest Airlines between Anchorage and Seattle in 1950.            
                                                                               
Number 1262                                                                    
                                                                               
BOB SOUTHALL, President, Alaska Hotel Motel Association, testified             
next via teleconference from Anchorage in support of HB 472.  He               
stated the association was very much in favor of this legislation.             
Mr. Southall noted he was the general manager of Anchorage Hilton              
Hotel.  He mentioned on previous testimony, and he commented on                
technology changes in inbound air travel, primarily the Boeing 747,            
and also the previously mentioned opening of airspace over the                 
former Soviet Union.  He noted these economic choices seriously                
affected Anchorage's hotel business immediately, noting the                    
Anchorage Hilton Hotel is the state's biggest hotel.  He indicated             
numerous organizations have been working together to recoup those              
losses for the past ten years.  He stated they believe this tax                
would make them start over in their attempts.  He also mentioned               
that the hotel business is a global economy.  He asked the                     
committee to pass HB 472 so that they could continue their job of              
improving the economics through both the airport and conventions.              
                                                                               
Number 1421                                                                    
                                                                               
DEBORAH VOGT, Deputy Commissioner, Department of Revenue, came                 
forward to testify in Juneau.  She stated the Knowles                          
Administration has not yet developed a complete position on this               
legislation; she noted the Administration is reviewing information             
and does not feel it has enough information on the tax effects of              
HB 472 to take a position.  She noted, however, the Governor has               
said a position will be developed as HB 472 passes through this                
body.  Ms. Vogt noted, as previous witnesses have testified, the               
bill would reverse the February 1998 Alaska Supreme Court decision             
in the case of State of Alaska, Department of Revenue v. OSG Bulk              
Ships, Inc.  She commented that decision is not final as the                   
taxpayers have moved for a rehearing and the court has not yet                 
decided that motion.  The decision holds that the income from                  
foreign-owned ships and aircraft is not exempt from Alaska's                   
corporate income tax; it finds that the section of the IRC is not              
incorporated into Alaska's tax.  She said, to understand the                   
decision, it was necessary to gain an understanding of the way                 
Alaska's corporate income tax works and its relationship with the              
federal tax.  Alaska taxes by apportionment and when any sort of               
business or industry does business in more than one tax                        
jurisdiction, the jurisdiction has to find a way to divide the way             
between the taxing jurisdiction and all other areas of the world.              
She noted a corporate income tax applies only when an industry                 
makes a profit and one method or another for dividing the income               
has to be enacted.  There are two basic approaches:  separate                  
accounting and formula apportionment.  She indicated the US                    
government has chosen separate accounting and Alaska has chosen                
formula apportionment.  She used the analogy of a restaurant check:            
each person's separate costs can be totaled individually or the                
bill can be divided equally, which she said is formula                         
apportionment.  Alaska uses a three-factor formula to divide the               
"pie" of an entity's income everywhere; it uses the factors of                 
payroll, property and sales, and it has a slightly modified formula            
for the apportionment of oil industry income.                                  
                                                                               
CHAIRMAN ROKEBERG referred to the two memorandums which had been               
included in the bill packet, noting she might want to refer to                 
these.  He commented they were the OSG Bulk Ships, Incorporated                
case outline and the Alaska corporate income tax selected                      
principles.                                                                    
                                                                               
Number 1628                                                                    
                                                                               
MS. VOGT noted the second sheet is sort of a glossary of terms used            
in Alaska's corporate income tax.  She stated the transportation               
carriers, as previously heard, are apportioned by "a days in port"             
or "a ground time formula" which looks at the industry's income                
everywhere and divides it among the various location in which it               
does business by comparing the days in port everywhere to the days             
in port in Alaska.  She said the airline formula comes down to "a              
departures in Alaska versus departures everywhere."                            
                                                                               
CHAIRMAN ROKEBERG asked if the days in port were part of the multi-            
state tax compact (MTC).                                                       
                                                                               
MS. VOGT replied that she was not sure if the MTC has the "days in             
port" formula but she knows it has the "ground time for airlines"              
formula.                                                                       
                                                                               
CHAIRMAN ROKEBERG indicated his reading leads him to believe that              
is a part of the MTC, and he said part of the court's opinion                  
referred to that section as part of its rationale for its decision,            
commenting it seemed to "boot-strap" off the MTC.                              
                                                                               
Number 1708                                                                    
                                                                               
MS. VOGT noted that Alaska is a member of the MTC and has adopted              
the Uniform Division of Income for Tax Purposes Act (UDITPA), which            
is what the court referred to as the MTC.  She said the next issue             
which has to be dealt with on the income is the "pie" that is                  
divided, the taxpayer's overall income.  She stated for many years             
the legislature had taken the legislation taxed on worldwide income            
and so the "pie" of the taxpayer's income divided up by the formula            
would be its income everywhere in the world.  In 1991, Alaska                  
followed many other states in adopting the "water's edge" method of            
taxation for all industries in Alaska except for the oil industry,             
which remains on the worldwide unitary business system.  Both of               
these systems look to not only the income of the taxpaying                     
corporation, the corporation doing business in Alaska; but also all            
of its affiliates, and applies what is called the "unitary                     
principle." The unitary principle defines what part of the                     
corporate family the tax will examine in determining "everywhere               
income."  Generally, a business engaged in the same type of work               
everywhere will be found to be unitary, noting the example of an               
international shipping company which might incorporate each of its             
ships separately but is in the business of international shipping:             
that will be a unitary business.  Before 1991, she indicated that              
industry would have been taxed by looking at the "pie" worldwide,              
and all of the ships, no matter where they went, would be included             
in the unitary approach.  Since 1991, only those corporations, and             
in this example, those ships, that have significant contact with               
the US would be included in that "pie."  Any corporation that                  
actually does business in Alaska would be included, and then any of            
its affiliates that do at least 20 percent of their business in the            
US.  She addressed Representative Ryan's previous comment about                
Barclays Bank PLC decision, which she said was a decision                      
litigating the validity of the worldwide unitary approach, noting              
she mentioned Alaska has since backed off from the worldwide system            
in favor of the "water's edge."  For example, the OSG Bulk Ships,              
Incorporated, case itself would not have even arisen today because             
the ships doing business in Alaska were American-bottomed ships and            
the affiliates that were included in the apportionable "pie" in                
that a case included some foreign ships that had no business in the            
US.                                                                            
                                                                               
Number 1930                                                                    
                                                                               
MS. VOGT noted those ships would now be excluded, so that taxpayer             
would not be before them.  She said the US uses a separate                     
accounting approach for "sourcing" income, and she says it does                
exactly that:  it sources income to the specific location in which             
it is earned.  What the court said was that Alaska's apportionment             
method which uses the formula to avoid double taxation was                     
inconsistent with the federal approach that adopts special rules               
like the 883 [IRC Section 883] for the purpose of avoiding double              
taxation.  She said Alaska's corporate income tax generates just               
above $300 million in annual income, and $270 million of that comes            
from the oil and natural gas industry, noting it is easy to                    
separate out because of the difference in formulas.  She said that             
leaves about $50 million for all other taxpayers in the US.  She               
stated DOR has not undertaken any compliance effort, noting it has             
been the DOR's position that IRC Section 883 does not apply in                 
Alaska, and the department assessed OSG Bulk Shipping,                         
Incorporated, in 1987.  Since that case has been proceeding though             
the system, DOR has not actively sought compliance from other                  
taxpayers but those taxpayers who come in front of the DOR for                 
other reasons, noting, "... for whatever reasons that an Alaska                
taxpayer might have affiliates that would come under 883, we have              
assessed or we have asked the companies for waivers of the statute             
of limitation, so there are some taxes out there that ... will be              
affected by the decision."                                                     
                                                                               
CHAIRMAN ROKEBERG confirmed that DOR has not enforced it.                      
                                                                               
                                                                               
Number 1991                                                                    
                                                                               
MS. VOGT replied DOR has not done an active compliance effort,                 
noting the US has a voluntary taxpaying system.  She said the DOR              
actively studies industries from time to time, noting that most of             
its efforts are spent on auditing.                                             
                                                                               
CHAIRMAN ROKEBERG asked if that was because OSG Bulk Ships,                    
Incorporated, filed an action.                                                 
                                                                               
MS. VOGT said she could not speak to that case.                                
                                                                               
CHAIRMAN ROKEBERG asked what the rationale was for the DOR's                   
action.                                                                        
                                                                               
MS. VOGT said some taxpayers come before DOR for other reasons and             
when the IRC Section 883 issue has arisen, DOR has either assessed             
it or waived the statute of limitations.  She noted DOR has not                
made an active compliance effort, indicating they have not gone out            
to the world telling businesses they ought be paying tax under IRC             
Section 883.                                                                   
                                                                               
CHAIRMAN ROKEBERG said the waiver of the statute of limitations                
says they can't use that as (indisc.) of defense to collect it if              
there is a favorable ruling on this case.                                      
                                                                               
MS. VOGT said that is correct.  Referring to an earlier question               
about whether the department would take any action right now, she              
stated DOR did not feel there was any action to take.  She said the            
legislature sets the tax policy in statute, and the court has just             
told them what that law means, and it is the DOR's job to apply the            
law.                                                                           
                                                                               
CHAIRMAN ROKEBERG underscored for the committee that the DOR is                
just doing its job here, not creating this problem.  He indicated              
they expected the DOR to collect taxes.                                        
                                                                               
Number 2292                                                                    
                                                                               
MS. VOGT said the Alaska Supreme Court ruling and HB 472 impact                
areas of revenue the committee has heard a lot about in this                   
meeting's testimony.  Regarding the cruise ship industry, she said             
Alaska taxes any shore-based activities, noting IRC Section 883                
only goes to the income earned by the ships and the aircraft.  To              
the extent that the business has other activities in the state,                
those are currently taxable.  Referring to testimony about                     
airlines, Alaska taxes those airlines that are in international                
commerce which are incorporated in the US or use American aircraft,            
and the same goes for shipping.  She would point out that it is her            
understanding that the LNG tankers currently on the water are                  
American-owned, noting she thinks they used to be foreign-owned but            
have recently been replaced, indicating she was referring to the               
Nikiski to Tokyo trade.  Therefore, she believes that is currently             
a taxable trade.  She referred to testimony from the natural                   
resource extraction industries, noting there was testimony that                
those shipping businesses are very marginal at the moment.  Ms.                
Vogt pointed out that this is corporate income tax, indicating that            
if there are no profits, there is no tax.                                      
                                                                               
TAPE 98-41, SIDE A                                                             
Number 0001                                                                    
                                                                               
MS. VOGT restated her previous point about the shipping companies              
affiliated with the natural resource industries and the corporate              
income tax not being applied until an entity is making money.  She             
referred to the fiscal note and said the DOR believes the revenue              
involved is between $3 and $8 million.  She indicated this is a                
rough estimate based on an analysis of several of the impacted                 
industries from public records and some information from current               
tax returns.  She said, however, the DOR is certainly looking for              
additional information and she invited any of the testifying                   
witnesses to provide the department with any actual numbers.  She              
indicated that while DOR knows there may be an impact, it has no               
idea of the order of magnitude of that impact.                                 
                                                                               
CHAIRMAN ROKEBERG commented that Ms. Vogt had said ANITA was                   
collecting approximately $300 million and $270 million was from                
oil, and $50 million from everything other than oil.  He noted the             
discrepancy in the numbers relating to the $50 million.                        
                                                                               
MS. VOGT indicated the actual total was actually approximately $320            
million, noting she could provide the exact numbers.  The oil and              
gas corporate income in FY 1997 collected $269,783,582; the other              
corporations paid $49,610,974.                                                 
                                                                               
CHAIRMAN ROKEBERG commented, noting the estimated was $3 million to            
$8 million, that they could have as much as a 10 percent increase              
in non-oil-related "companies."                                                
                                                                               
MS. VOGT agreed it could be around 10 percent of the non-oil and               
gas.                                                                           
                                                                               
Number 0281                                                                    
                                                                               
REPRESENTATIVE COWDERY asked what was unique about Alaska's tax law            
that would justify the court's interpretation.                                 
                                                                               
MS. VOGT said the court held that Alaska's apportionment method of             
taxation is theoretically different from the US's method, and                  
therefore the US tax policy would not be automatically incorporated            
into Alaska's law.  She indicated in this case the court found that            
it was not.  She said other states have apportionment and other                
states haven't found that, but she said she wasn't aware of a court            
case in another state.  Most states, as the committee has heard,               
either have a piece of legislation incorporating IRC Section 883               
into their statutory structure, or have simply taken the position              
that the federal provision is incorporated and have not taxed.  She            
commented that they would be pioneers.                                         
                                                                               
REPRESENTATIVE RYAN noted Ms. Vogt was correct in response to his              
reference to Barclays Bank PLC, which was on worldwide income.                 
However, he referred to the articles in the magazine, The                      
Economist, where the Prime Minister of Great Britain was "talking              
about dumping all of the reciprocal tax (indisc.) with the United              
States."  Representative Ryan indicated Great Britain was not the              
only country considering such actions; he stated, therefore, this              
sort of thing can lead to a lot of "nastiness" and he didn't know              
if it was necessary that they do these sorts of things.                        
                                                                               
CHAIRMAN ROKEBERG asked Ms. Vogt if she could tell the committee               
when the MTC, that section of law, was adopted in Alaska.                      
                                                                               
MS. VOGT responded that she believes UDITPA was adopted before                 
statehood.                                                                     
                                                                               
CHAIRMAN ROKEBERG referred to AS 43.20.021(a), which HB 472                    
affects, noting it says in the footnote that this was a 1987                   
amendment to subsection (a), stating, "First sentence substituted              
Sections 26 U.S.C. 1 through 1399 and 601 ... Internal Revenue Code            
which substituted for subtitle (indisc.) Chapter 1 of subtitle A of            
the 1954 Internal Revenue Code ... et cetera, et cetera, and these             
other things."  He said he asked her when IRC Section 883 was                  
adopted into the Alaska Statutes by that sentence.                             
                                                                               
MS. VOGT replied she was not sure when the federal government                  
adopted IRC Section 883, but the 1987 amendment he was referring to            
simply took out the references to subtitles and so on in IRC, and              
cited the actual sections that were incorporated.                              
                                                                               
CHAIRMAN ROKEBERG indicated he was trying to find out when IRC                 
Section 883 was or wasn't adopted under the Alaska tax scheme.                 
                                                                               
Number 0563                                                                    
                                                                               
MS. VOGT said she couldn't answer that specifically because she                
didn't think the legislature has specifically addressed that.  She             
noted the legislature has incorporated large parts of the code into            
the Alaska Statutes and Alaska's court has traditionally looked at             
the state's tax policy to decide which of those broadly                        
incorporated provisions it would find are actually incorporated.               
She noted there were a lot in the general incorporation that Alaska            
does not follow.                                                               
                                                                               
CHAIRMAN ROKEBERG indicated he was trying to determine legislative             
history.  He commented that there were letters in the bill packet              
from federal agencies to other states who had been considering                 
taxes like this one regarding the reciprocity retaliation and the              
national policy of discouraging sub-national taxation of foreign               
companies, noting these were treaty obligations between the US                 
government and other governments.  He asked if Alaska wasn't doing             
something that was against national policy in terms of                         
international trade and international relations.                               
                                                                               
Number 0675                                                                    
                                                                               
MS. VOGT said that is a policy argument that the legislature will              
want to consider.  She commented there have been arguments, for                
example, that the motor fuel tax applied to international air                  
carriers would violate those treaties, and United States Supreme               
Court has ruled that state taxation is not preempted by those                  
treaties.  She said it was clear that Alaska has the freedom to                
adopt its own policies.  She indicated the DOR has not heard from              
the US state department since the February Alaska Supreme Court                
decision, and she is not is not sure what the state department's               
current position would be.                                                     
                                                                               
CHAIRMAN ROKEBERG indicated he would find out.                                 
                                                                               
REPRESENTATIVE RYAN asked whether the legislature also accepted                
various accompanying private letter rulings if the legislature                 
adopted a section of Internal Revenue Code.                                    
                                                                               
MS. VOGT replied that the Internal Revenue Code regulations are                
certainly looked to by the DOR, and letter rulings and                         
interpretations often become a part of the way Alaska applies its              
laws.                                                                          
                                                                               
CHAIRMAN ROKEBERG said he appreciates the Governor's stance on                 
listening to what people want without making a preconceived                    
judgement, noting he understands and appreciates that.                         
                                                                               
Number 0792                                                                    
                                                                               
SUSAN BURKE, Attorney for the Northwest Cruise Ship Association,               
came forward to testify next in Juneau.  She said she represented              
the association primarily as a lawyer and came to the hearing to               
answer any questions the committee might have.  In background, she             
stated the association participated in the OSG Bulk Ships,                     
Incorporated, case as friend of the court, amicus curiae, filing a             
brief in support of the position the company was taking in the                 
case.  She did not represent the cruise ship association in that               
endeavor; she represented the AVA, which had also filed a brief in             
support.  She said she did not have much to add in terms of the                
policy issues, noting a lot of testimony from a wide array of                  
business interests had been heard.  She indicated this reminded her            
of when she was working for the IBM Corporation in 1991 and 1992,              
trying to persuade the legislature to adopt the "water's edge"                 
legislation and prohibit the DOR from continuing to require the                
worldwide combination.  She noted questions arose then as well.                
She said she thought they really need to take a close look when so             
many diverse industries tell how important it is to maintain the               
"status quo."  She indicated that because the DOR has never                    
actually collected this tax, the state would not lose existing                 
revenue if this legislation was passed.  Ms. Burke commented that              
she was not a technical tax lawyer.                                            
                                                                               
CHAIRMAN ROKEBERG asked why the bill's retroactive to 1993                     
effective date was included and what its effect would be.                      
                                                                               
MS. BURKE replied that the January 1, 1993 date was there to some              
extent because of the statute of limitations.  She indicated the               
industry has always maintained that it was the legislature's intent            
for the IRC Section 883 exemption to apply under ANITA, and it was             
simply the DOR's interpretation of that early legislative intent               
which differed.  She noted there has been dispute for some time,               
which the supreme court resolved in favor of DOR.  She said, with              
the greatest respect for the court, she thinks it is wrong, and she            
thinks the legislature to have intended that provision to have                 
always been in the law.  She commented, regarding the effective                
date, that she did not know if it had any particular impact but it             
ensured there was no "window of time" during which the OSG Bulk                
Shipping, Incorporated, decision would have in effect and then no              
longer any effect in the future.  She said they are simply                     
maintaining the"status quo," taking it back to a reasonable date.              
                                                                               
Number 1080                                                                    
                                                                               
CHAIRMAN ROKEBERG mentioned HB 12 from 1991 which would have                   
excluded IRC Section 883 as it related to water vessels only, and              
he referred to comments from the House Finance Standing Committee              
at that time, by Representative Fran Ulmer.  He stated:                        
"Representative Ulmer stated she would not support the proposed CS             
[committee substitute] because the philosophy was inconsistent with            
the intent of the bill.  She thought that the original bill was                
intended to send a message that Alaska has a friendly business                 
climate for foreign investors.  The original bill changed the                  
worldwide apportionment to the water's edge method, like all other             
states.  With the adoption of the proposed CS, (and this is for HB
12), Alaska would now be the only state not having the exemption               
(referring to the IRC Section 883 exemption) to the federal code."             
Chairman Rokeberg said this means that Lieutenant Governor Fran                
Ulmer went on record in support of this particular legislation in              
1991, and he asked Ms. Burke if she remembered what happened with              
HB 12.                                                                         
                                                                               
MS. BURKE noted she did not remember the exact numbers, but said               
the issue came up during the discussions and consideration of the              
"water's edge" legislation, noting there was an attempt to amend               
that legislation to remove the IRC Section 883 exemption from the              
Alaska income tax.  She said eventually the issues were split off              
and the "water's edge" legislation was allowed to proceed without              
that provision.  She said, however, there had been a good deal of              
discussion in the legislature about that.  She indicated a bill                
dealing with only the water carriers was introduced which was never            
enacted and brought up a great deal of testimony from a number of              
legislators throughout the hearing process about what a bad idea it            
would be.  She indicated the committee had hear similar testimony              
this day, stating it is still a bad idea.                                      
                                                                               
CHAIRMAN ROKEBERG asked Ms. Burke if she had researched legislative            
histories for tax adoptions in various other forms when she was                
doing her amicus curiae brief.                                                 
                                                                               
Number 1240                                                                    
                                                                               
MS. BURKE answered in the affirmative, stating she was unable to               
find anything useful because it was too early, commenting that it              
has only really been in the last 20 years that the legislature has             
kept the kind of records they currently have.                                  
                                                                               
CHAIRMAN ROKEBERG asked Ms. Burke if she thought it was unusual for            
there not to be a lot of discussion between Alaskan legislators                
when adopting some other federal law by reference, noting Ms. Burke            
had observed the legislature for a long time.                                  
                                                                               
MS. BURKE indicated she thought there would be specific provisions             
in the statutes if there had been concerns, however she indicated              
that argument had probably been made to the Alaska Supreme Court               
before it made the ruling.  She referred to the rehearing but said             
reversals were unusual.  She noted that very soon after a ruling is            
made, it is possible for the losing party to file a petition for               
rehearing asking the court to reconsider the decision.  She said it            
is unusual for those petitions to be granted, noting the grounds               
are very narrow, but it has happened.                                          
                                                                               
CHAIRMAN ROKEBERG asked Ms. Vogt if Ms. Burke's testimony regarding            
the effective date was correct or if she wanted to elaborate.                  
                                                                               
Number 1365                                                                    
                                                                               
MS. VOGT commented she had noticed that date provision.  She said,             
normally, if a bill contains a  retroactivity provision, it should             
have an immediate effective date and HB 472 does not have an                   
immediate effective date.  In terms of retroactive fact, the DOR is            
faced, when people have not previously filed tax returns, with the             
question of how far back should DOR go, noting the DOR has some                
discretion in this area.  The court has told DOR what the law is               
and the department has no discretion in whether or not to apply the            
law.  She indicated HB 472's retroactivity provision would                     
foreclosing DOR from going back.  She referred to Ms. Burke's                  
testimony, indicating she thought the intent would be to prohibit              
the enforcement of the provision in past years.                                
                                                                               
CHAIRMAN ROKEBERG asked Ms. Vogt if she believed the January 1,                
1993, date was appropriate.                                                    
                                                                               
MS. VOGT indicated she would like to know the Department of Law's              
opinion, indicating it is a policy call by the legislature.  She               
indicated that normally the effective date is January 1 of the                 
current tax year or the prospective tax year when changes to the               
corporate income tax are adopted.                                              
                                                                               
CHAIRMAN ROKEBERG asked why DOR had not collected this tax for some            
time, discussing this briefly.                                                 
                                                                               
Number 1523                                                                    
                                                                               
MS. VOGT said she has testified that DOR has not actively sought               
compliance with their interpretation of the IRC Section 883                    
exemption, noting that a few taxes cases where DOR has either                  
assessments or waivers that would be affected by a retroactive                 
date.                                                                          
                                                                               
CHAIRMAN ROKEBERG said he would like to know the number of waivers             
and how many the DOR had attempted to enforce.                                 
                                                                               
MS. VOGT indicated she would provide as much information as she                
could without breaching taxpayer confidentiality.                              
                                                                               
CHAIRMAN ROKEBERG referred to his comment about prior rationale and            
asked Ms. Vogt if the DOR had a written policy on how this                     
provision was handled or how those decisions were made.                        
                                                                               
MS. VOGT said DOR's policies are enacted into regulations so it                
does not do the department much good to have internal policies                 
about tax laws.  She noted there is no regulation on IRC Section               
883 and she would hesitate to speak for the last ten years.  She               
said that this controversy working its way up through the courts               
has come to her attention during her tenure at DOR.  She indicated             
it seemed appropriate to wait and see what the court's action would            
be.  She indicated she guessed she would say it was an "unwritten              
policy."                                                                       
                                                                               
Number 1652                                                                    
                                                                               
CHAIRMAN ROKEBERG called an at ease at 5:22 p.m.  The committee                
came back to order at 5:26 p.m.                                                
                                                                               
Number 1664                                                                    
                                                                               
REPRESENTATIVE COWDERY made a motion to move HB 472 out of                     
committee with individual recommendations and the accompanying                 
fiscal note.  There being no objections, it was so ordered.                    
                                                                               
ADJOURNMENT                                                                    
                                                                               
Number 1690                                                                    
                                                                               
CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing              
Committee meeting at 5:27 p.m.                                                 

Document Name Date/Time Subjects