Legislature(1997 - 1998)
03/30/1998 03:20 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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.