Legislature(1993 - 1994)

05/08/1994 05:00 PM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
             HOUSE STATE AFFAIRS STANDING COMMITTEE                            
                           May 8, 1994                                         
                            5:00 p.m.                                          
  MEMBERS PRESENT                                                              
  Representative Al Vezey, Chairman                                            
  Representative Pete Kott, Vice Chairman                                      
  Representative Bettye Davis                                                  
  Representative Gary Davis                                                    
  Representative Harley Olberg                                                 
  Representative Jerry Sanders                                                 
  Representative Fran Ulmer                                                    
  MEMBERS ABSENT                                                               
  COMMITTEE CALENDAR                                                           
  SB 377:   "An Act relating to state agency fiscal                            
            procedures, including procedures related to the                    
            assessment and collection of certain taxes; and                    
            providing for an effective date."                                  
            HELD IN COMMITTEE                                                  
  WITNESS REGISTER                                                             
  TOM WILLIAMS, Alaska Tax Counsel                                             
  BP Exploration                                                               
  P.O. Box 196612                                                              
  Anchorage, AK  99515                                                         
  Phone:  564-5955                                                             
  POSITION STATEMENT: Opposed CSSB 377(FIN)am and the proposed                 
                      HCSCSSB 377(STA)                                         
  TOM THERIOT, Manager                                                         
  Alaska Interest Organization                                                 
  Exxon Company of America                                                     
  P.O. Box 196601                                                              
  Anchorage, AK  99519                                                         
  Phone:  564-3778                                                             
  POSITION STATEMENT: Opposed CSSB 377(FIN)am                                  
  PREVIOUS ACTION                                                              
  BILL:  SB 377                                                                
  SHORT TITLE: STATE AGENCY FISCAL PROCEDURES                                  
  SPONSOR(S): FINANCE                                                          
  JRN-DATE     JRN-PG               ACTION                                     
  04/13/94      3633    (S)   READ THE FIRST TIME/REFERRAL(S)                  
  04/13/94      3633    (S)   FINANCE                                          
  04/13/94      3650    (S)   FIN WAIVED UNIFORM RULE 23                       
  04/14/94              (S)   FIN AT 09:00 AM SENATE FIN 518                   
  04/20/94              (S)   RLS AT 06:45 PM FAHRENKAMP                       
                              ROOM 203                                         
  04/21/94              (S)   FIN AT 10:00 AM SENATE FIN 518                   
  04/21/94              (S)   RLS AT 02:15 PM FAHRENKAMP                       
                              ROOM 203                                         
  04/21/94      3839    (S)   FIN RPT CS 6DP 1DNP SAME TITLE                   
  04/21/94      3839    (S)   FN TO SB & CS PUBLISHED(ADM)                     
  04/21/94      3839    (S)   ZERO FN TO SB & CS PUBLISHED                     
  04/22/94      3870    (S)   RLS RPT  3CAL 1NR  4/22/94                       
  04/22/94      3876    (S)   READ THE SECOND TIME                             
  04/22/94      3877    (S)   FIN  CS ADOPTED Y12 N8                           
  04/22/94      3877    (S)   AM NO  1     MOVED BY KERTTULA                   
  04/22/94      3882    (S)   QUESTION: AM NO 1 GERMANE?                       
  04/22/94      3883    (S)   AM NO  1  GERMANE Y17 N3                         
  04/22/94      3883    (S)   AM NO  1     ADOPTED Y14 N6                      
  04/22/94      3883    (S)   AM NO  2     MOVED BY DONLEY                     
  04/22/94      3884    (S)   AM NO  2     FAILED  Y9 N11                      
  04/22/94      3884    (S)   ADVANCED TO THIRD READING UNAN                   
  04/22/94      3884    (S)   READ THE THIRD TIME                              
                              CSSB 377(FIN) AM                                 
  04/22/94      3884    (S)   PASSED Y16 N4                                    
  04/22/94      3885    (S)   EFFECTIVE DATE PASSED Y17 N3                     
  04/22/94      3885    (S)   Pearce  NOTICE OF                                
  04/22/94      3885    (S)   TAKE UP RECON ON SAME DAY                        
  04/22/94      3937    (S)   RECON TAKEN UP SAME DAY                          
                              Y18 N2                                           
  04/22/94      3937    (S)   PASSED ON RECONSIDERATION                        
                              Y16 N4                                           
  04/22/94      3938    (S)   EFFECTIVE DATE  SAME AS PASSAGE                  
  04/22/94      3941    (S)   TRANSMITTED TO (H)                               
  04/27/94      3746    (H)   READ THE FIRST TIME/REFERRAL(S)                  
  04/27/94      3747    (H)   STA, O&G, JUDICIARY, FINANCE                     
  05/07/94              (H)   STA AT 08:00 PM CAPITOL 102                      
  ACTION NARRATIVE                                                             
  TAPE 94-57, SIDE A                                                           
  Number 000                                                                   
  CHAIRMAN AL VEZEY called the meeting to order in the                         
  Butrovich Room at 5:07 p.m.  Members present were                            
  REPRESENTATIVES KOTT, SANDERS, G. DAVIS and ULMER.                           
  committee table.                                                             
  (REPRESENTATIVE OLBERG joined the meeting at 5:08 p.m.)                      
  SB 377 - STATE AGENCY FISCAL PROCEDURES                                      
  in opposition to CSSB 377(FIN)am and the proposed HCSCSSB
  377(STA).  He said,                                                          
  "I was Commissioner of Revenue for Alaska from 1979 to 1982.                 
  In my work for the state, I was the actual draftsman of                      
  almost all of the tax regulations that underlie the                          
  outstanding disputes over past taxes.  I joined BP in 1987 -                 
   five years after leaving government service.  During those                  
  five years I worked as an attorney in private practice on                    
  real estate and banking matters, and as general counsel for                  
  an Alaska Native Corporation.                                                
  "I am here today to testify on behalf of BP against the                      
  proposed retroactive changes to the statute of limitations                   
  that appear as sections 1, 8, 9 and 14 of the Senate's                       
  version of SB 377, and as sections 1, 2, 3 and 7 of the                      
  Administration's proposed House CS for SB 377 that Attorney                  
  General Botelho gave the committee yesterday afternoon.                      
  These retroactive changes are substantially the same in both                 
  "Because oil and gas taxes are not very familiar to those                    
  who don't specialize in them, let me take a few moments to                   
  review how the process currently works.  Today, the North                    
  Slope should produce about 1.6 million barrels of oil.                       
  Almost half of that oil is BP's.  By the end of next month,                  
  we will have to pay production tax on our oil.  When we do,                  
  we will also file tax returns explaining how we calculated                   
  the amount of our tax.  Then the ball is in the state's                      
  court.  The Department of Revenue has the right to audit our                 
  tax returns, and they do.  If the auditors believe BP should                 
  have paid more tax than we actually did, they give us a bill                 
  for the extra tax, plus interest.  This bill for additional                  
  tax is called an assessment.  That's all an assessment is -                  
  a bill for additional tax.                                                   
  "When a taxpayer gets this bill or assessment, he has                        
  several choices.  He can pay the whole bill.  He can dispute                 
  the whole assessment by filing an appeal.  Or he can pay                     
  some of the assessment and dispute the rest.  Alaska's tax                   
  laws and regulations require taxpayers to pay any portion of                 
  the tax bill that they do not contest.                                       
  "Now getting an assessment or tax bill doesn't necessarily                   
  mean that you actually owe the additional money.  Auditors                   
  being human, they can make mistakes just like anyone else.                   
  And BP has received assessments in the past where there were                 
  arithmetic errors - in one case the total amount of the                      
  assessment was $2 million more than the sum of the                           
  individual parts.  Other times the auditors may have misread                 
  the tax laws and regulations and made a claim that is                        
  incorrect or not allowed.                                                    
  "Whatever the nature of a mistake in an assessment, a                        
  taxpayer has the right to ask the state to correct the                       
  error.  The way a taxpayer asks for the correction is to                     
  file an appeal.  If the mistake is a simple one - say the                    
  auditor added two plus two and wrote down five instead of                    
  four - the taxpayer should ask for an informal conference                    
  because it shouldn't take much to show the mistake to the                    
  department and get it corrected.  In fact, BP has usually                    
  requested informal conferences when we appeal in order to                    
  try to iron out the computational errors, such as the $2                     
  million mistake I mentioned a moment ago.                                    
  "It has probably been suggested to at least some of you by                   
  the Administration that BP has asked for these informal                      
  conferences in order to drag out the appeal and postpone the                 
  time we have to pay up.  Let me state clearly now for the                    
  record that BP asked for informal conferences, often with                    
  encouragement from the department itself, in order to first                  
  work out these computational items and other simple matters,                 
  so that any more difficult underlying issues can then be                     
  presented and dealt with on their own, without distractions                  
  from these side issues.                                                      
  "After the simple matters are addressed in the informal                      
  conference, the taxpayer can ask for a formal hearing on the                 
  more difficult questions, such as whether the auditors                       
  misread the tax statutes and regulations.  If the assessment                 
  was clean in terms of math errors and the like, the taxpayer                 
  can bypass the informal conference and go directly to formal                 
  to address questions of legal interpretation and sound tax                   
  policy.  After the formal hearing, the Department's hearing                  
  officer writes a decision.  The Commissioner of Revenue then                 
  reviews that decision.  If the Commissioner approves the                     
  decision, it is formally issued, and becomes the official                    
  department position on the matter.  At that stage, the                       
  taxpayer has 30 days to appeal the decision to court.  So                    
  that, in outline, is how this tax appeals works.                             
  "Now how does the statute of limitations fit into this                       
  scheme?  While the statute may seem complicated, it really                   
  isn't if you remember just two simple rules - three years to                 
  audit, six years to collect.  The Department has three years                 
  from the filing of a tax return in which to audit it and                     
  send the taxpayer a bill for any additional tax that the                     
  auditors think should have been paid.  Then it has six years                 
  from the time it sends that bill, in which to go to court if                 
  necessary to collect it.  The six year statute is satisfied                  
  if, within the six years, the Department considers and                       
  decides a tax appeal and the appeal gets into court.  In                     
  other words, when the appeal does get into court, it becomes                 
  a `judicial proceeding' of the type that the six-year                        
  statute talks about.  So, let me restate the two simple                      
  rules about the statute of limitations - three to audit, six                 
  years for the Department to hear and decide the appeal.                      
  "Now I would like to talk about what SB 377 and the                          
  Administration are proposing with respect to the statute of                  
  limitations.  One is to change the three-year audit statute                  
  so that, even after the three years are up, the auditors can                 
  raise new and unrelated issues and increase their claims                     
  without limit for more tax at any time so long as the                        
  Department has not finished its consideration of the appeal                  
  and issued its formal hearing decision.  The second is to                    
  change the six-year statute so that the clock for the six                    
  years isn't running while the tax assessment is being                        
  appealed within the Department of Revenue or in court.                       
  "Think about what this means.  The six-year statute                          
  currently sets a time limit on how slowly the Department can                 
  consider and decide a tax appeal.  It has to get its work                    
  done on the appeal in those six years.  But under SB 377 and                 
  the Administration's proposed House CS, the six-year clock                   
  won't be running while the Department considers the appeal.                  
  So the Department will, under this legislation, be free to                   
  take 10 years, 15, 20, maybe even half a century, to make a                  
  final decision.  And, under the change proposed to the                       
  three-year statute, at any point during all that time while                  
  the Department is thinking about the appeal, it can change                   
  its mind about what the tax laws meant years ago when that                   
  taxpayer originally filed its return.  This changing of the                  
  Department's mind during the course of an extended                           
  protracted tax appeal, is one of the most pernicious                         
  problems Alaska has with its present tax system.  And                        
  because of tax confidentiality, it is one of the most                        
  difficult to explain to the public with real life examples.                  
  In effect, this revisionism in tax policy makes it                           
  impossible for a taxpayer to know what the correct amount of                 
  tax is when he has to file the return and pay the tax.                       
  Absolutely, impossible.                                                      
  "Really? you ask.  Yes, really.  Suppose I go the                            
  Commissioner Rexwinkel and say, here's what's happening with                 
  my oil, what I'm selling it for, what I'm trading it for,                    
  what others are selling their oil for.  And I ask him, how                   
  do I compute my tax liability?  How much do I owe?  And                      
  suppose he gives me an answer.  Is that the correct and                      
  final answer?  No, it's not -at least not in our experience.                 
  He's just the commissioner.                                                  
  "There are a number of issues where taxpayers, in our                        
  experience, including us and our predecessor Sohio, went to                  
  the Department while I was commissioner, and they were told                  
  how to deal with an issue.  They were given answers, by me,                  
  and by other people who were policy-makers in the Department                 
  of Revenue at that time.  And basically the taxpayers                        
  followed the answers they were given.  Although the auditors                 
  now admit that what taxpayers were told was really the                       
  policy of the Department back then, they claim that they are                 
  not bound by prior policy, that it was a mistake, and they                   
  can correct it and impose their new and very different tax                   
  policy back through time to the periods when the                             
  Department's original policy was different.                                  
  "Let me give you just one real-life example of this.  It's                   
  from last year's ARCO tax decision by the Alaska Supreme                     
  Court.  Under the separate accounting tax statute, taxpayers                 
  were specifically allowed a tax deduction for interest on                    
  money they borrowed to build the pipeline.  The regulations                  
  specifically allowed it, too.  But the auditors claimed that                 
  the interest was deductible only if the pipeline company                     
  itself had actually borrowed the money.  If the parent                       
  company borrowed the money first and then lent it to the                     
  pipeline company, they claimed the interest wasn't                           
  deductible.  Nothing in the regulation required this                         
  strained reading, where the mere form of a deal would                        
  dictate the tax substance.  So in 1985, Commissioner Mary                    
  Nordale, with Bruce Botelho as her Deputy Commissioner,                      
  amended the regulation to make it absolutely clear that the                  
  interest was deductible regardless of whether it was the                     
  parent company, the pipeline company or some other                           
  affiliated company that first borrowed the money to build                    
  the pipeline.  But that still wasn't the end of it.  In 1986                 
  or `87 the auditors began claiming that only part of the                     
  interest was deductible, even though they admitted that all                  
  of it was paid on money borrowed to build the pipeline.                      
  They argued that a ratio should be applied to the interest,                  
  based on ARCO's share of cost of the pipeline versus ARCO's                  
  total assets.  Such a ratio was used under separate                          
  accounting, to limit the deductible interest on any money                    
  ARCO borrowed to develop Prudhoe Bay - it was prescribed in                  
  the statute, in the regulations, and the details for                         
  calculating it were set out on the tax form.  But there was                  
  nothing like that ratio anywhere in the statute, regulations                 
  or  the tax form with respect to pipeline interest.  The                     
  auditors simply made it up, or their consultants helped                      
  them.  And ARCO had to appeal this all the way to the Alaska                 
  Supreme Court before it was finally overturned.  The ARCO                    
  case is published in the Pacific Reporter, and you can find                  
  it, if your interested, across the street.  The full record                  
  in the case is open to the public now, and if you're really                  
  interested, you can probably  go to the courts, they                         
  probably still have the files  in the case and you could                     
  look through and confirm this for yourselves.  I am not                      
  making it up.                                                                
  "And after all this, have the auditors finally stopped on                    
  the pipeline-interest issue?  No.  I can't go into details                   
  because of confidentiality, but since the ARCO case, they                    
  have begun raising a new theory to limit BP's deductible                     
  pipeline interest to something less than what we actually                    
  "This story illustrates a subtle change over the last 10 to                  
  15 years in the State's objective in auditing tax returns.                   
  Instead of trying to audit and determine the correct amount                  
  of tax, the objective has become one of trying to find the                   
  largest possible amount of tax that can be claimed,                          
  regardless whether it has any relation to the right amount                   
  of tax or not.  All that matters is that there at least be                   
  some slim reed of rationalization to support the claim.                      
  That way, if a company settles its tax disputes with the                     
  State, it will have to pay something - maybe only five cents                 
  on the dollar - to settle that claim.  But, even at a nickel                 
  on the dollar, those are nickels that wouldn't be collected                  
  if the claim hadn't been made.                                               
  "Now the state itself has been giving indications that his                   
  change has been happening.  A few years back, Bruce Botelho                  
  as Deputy Attorney General told a Senate committee that some                 
  of the claims for past taxes were long shots in terms of                     
  winning, but the dollars involved were so large the State                    
  couldn't just back off and abandon them.  And Bill                           
  Floerchinger, who was Director of Oil Tax Audits and then                    
  Assistant Revenue Commissioner under the Cowper                              
  Administration, testified to the legislature that the                        
  assessments had `a lot of water' in them - a gripping                        
  metaphor for something big with little substance to it.                      
  "The proposed changes to the statutes of limitations would                   
  ratify this process and enshrine the authority to continue                   
  it for all tax periods before this year.  Even if this is                    
  legal-and we contend it isn't - is this fair, is this wise                   
  tax policy?  I don't think so.  Neither does the                             
  Administration, because they want to cut it off for taxes                    
  beginning this year.  They must recognize the need for                       
  certainty about the tax has to be satisfied if the oil                       
  companies and others are going to make investments here in                   
  the future.  That's why their proposal for the future is a                   
  rule that gives the Department five years to audit and make                  
  its claim for more tax, and after that the tax claim cannot                  
  be increased.                                                                
  "But I ask you this, if their proposal for the past is such                  
  poor policy that even they don't want it for the future, why                 
  should it be allowed for any tax period, past or future?  I                  
  don't think it should.  Enacting it just for the past does                   
  not mean that Alaska will escape from the effects for the                    
  future.  Because enacting the retroactive changes sends this                 
  message to all investors - if the state wants your money                     
  badly enough, it will do anything, even change its laws                      
  retroactively, in order to get it.  That's pretty ominous to                 
  someone thinking about putting real money here.  It scares                   
  them.  It scares us.                                                         
  "Now what about the Administration's claim that this                         
  retroactive legislation is necessary to keep nearly $3                       
  billion in tax claims from falling off the table?  Are the                   
  oil companies walking away from all responsibility for that                  
  money because of a technicality?                                             
  "To answer that, let me point out that for some taxpayers,                   
  including BP, the tree-year periods and the six-year periods                 
  have already run out.  It's not that they are about to run                   
  out.  The already have.  Those events have happened, and                     
  there is no way to legislate them away, any more than you                    
  could legislate that the earth is flat.                                      
  "So things have happened that have legal consequences and                    
  effects.  Exactly what those consequences and effects are,                   
  is a matter of dispute.  We say that the three-year statute                  
  prevents the state from raising new claims after that time.                  
  The auditors raised them anyway.  Whether those claims can                   
  legally be raised, is a question that is now before the                      
  Alaska Supreme Court, in the Exxon case.                                     
  "Similarly, for some of the assessments against BP and                       
  others, more than six years have run since those assessments                 
  were issued.  We say the statute means what it say, and it's                 
  too late for the state to collect the money it billed in                     
  those assessments.  The State says the clock under the                       
  present law should be stopped during the time our appeal is                  
  going on.  Courts in other states have read similar                          
  limitations on collection as having an implied `time out'                    
  provision as the State contends.  Again, this is a matter                    
  for the Alaska courts to decide, they have not decided it so                 
  far, but presumably they will in the future.                                 
  "Now just because our legal position is that the late claims                 
  could not be made and that the oldest assessments cannot be                  
  collected, does not mean we think we should pay nothing on                   
  those claims at all in settlement.  There is a material                      
  litigation risk that our legal positions will be rejected by                 
  the courts, and the State's position upheld.  Just look at                   
  the record, since 1970 in the number of tax cases, which is                  
  over 20, that the Alaska Supreme Court has decided,                          
  taxpayers have won only two.  So the odds are against you.                   
  If the State's position is upheld, we will have to pay and                   
  the statutes of limitation won't prevent the State from                      
  getting all the money it's entitled to.  On the other hand,                  
  if we win, then some of the State's claims will be lost.                     
  "That may sound like a harsh result, but it's no different                   
  from the case where someone gets hit by a car and then files                 
  suit for damages the day after the statute of limitations                    
  runs out for filing such lawsuits.  It's too bad, but the                    
  plaintiff can't sue.  That's what the statute of limitations                 
  "Passing this retroactive legislation won't mean that the                    
  statute of limitations issue will be resolved.  Far from it.                 
  Over 18 years of retroactivity is a long time to be reaching                 
  back and changing things.  It is likely there will be                        
  litigation over that.  And if there is, there will once                      
  again be litigation risk for each side that the other side                   
  will win.  The cases on retroactivity suggest that the State                 
  should win if the retroactive change cures some technical                    
  flaw in the current statute, as opposed to materially                        
  changing the substance of the current statute.  If it is not                 
  a curative change, the retroactivity should be                               
  "Much of the question of whether retroactivity is curative                   
  or not, will depend on what the present laws mean.  If they                  
  mean, what the State, in court, is arguing they mean, then                   
  SB 377 is probably curative and the retroactivity will be                    
  okay.  Of course, if the courts rule in the State's favor on                 
  the meaning of the present laws, then you don't need for 377                 
  because they already mean what the amendment would do.  And                  
  on the other hand, if the courts rule that the present laws                  
  don't mean what the State is arguing for, then SB 377 is                     
  probably not curative and its retroactivity will be                          
  "Representative Ulmer was very interested at yesterday's                     
  hearing about whether the proposed retroactive changes in                    
  this legislation are really nothing more than affirmation of                 
  the Department of Revenue's longstanding practice and                        
  position, or whether they are material departures from prior                 
  practice.  As a former Commissioner of Revenue, I have some                  
  qualification to answer her question.                                        
  "The three-year statute of limitations was enacted in 1976.                  
  The Department of Revenue's very first regulation about that                 
  statute after its enactment was a regulation adopted under                   
  the separate accounting tax, former AS 43.21.  This                          
  regulations was section 700(e) of chapter 12 of the                          
  Department's regulations, adopted early in 1979.  Around                     
  1981 the chapter number was changed to 21 instead of 12, but                 
  the regulation itself was left unchanged.  I wrote that                      
  regulation.  John Messenger, the Deputy Revenue Commissioner                 
  at that time, was my boss and he worked closely with me in                   
  reviewing my drafts of the separate accounting regulations.                  
  He is now one of the State's outside legal counsel in these                  
  cases, and he was here for the negotiations over this                        
  legislation during the past few days.  If he is still                        
  around, you could ask him to confirm what I tell you about                   
  the separate accounting regulations.                                         
  "At any rate, section 700(e) says, and I quote:  `Returns                    
  and assessments under this section are subject to amendment                  
  for three years from the date of the original notice of                      
  assessment.'  Let me repeat the key part - assessments are                   
  subject to amendment for three years from the date of the                    
  original notice of assessment.  This doesn't sound to me                     
  like a statement that new amendments can be made after the                   
  three years are up.  Does it to you?                                         
  "In point of fact, it was intended to mean - and as its                      
  draftsman, I ought to know what it's supposed to mean - just                 
  what it says.  Three years to audit and issue the final tax                  
  bill.  No further amendments after that time is up, unless                   
  the three years were extended by mutual agreement with the                   
  "Actually, and enough time has passed that I can safety say                  
  it now, section 700(e) was really kind of a stretch of the                   
  statute of limitations to begin with.  The statute says it                   
  runs from the date the taxpayer files its return.  Under                     
  separate accounting, that was no later than April 15th,                      
  following the tax year.  But section 700(e) says the three                   
  years start running from the date of the notice of                           
  assessment, which was August 15.  Now there were aspects of                  
  the separate accounting that made it more like an ad valorem                 
  tax, in which the tax obligation is fixed when the tax                       
  assessor sends you the tax bill.  With separate accounting,                  
  the obligation to pay up was fixed, subject to audit, by the                 
  issuance of the tax bill or the assessment in August and not                 
  by the return filed in April.  And so Mr. Messenger and I                    
  both felt this bit of a stretch was justifiable given the                    
  peculiar nature of separate accounting.  But the point is,                   
  the Department's policy and practice, as reflected in this                   
  1979 regulation and recodified in 1981, did not contemplate                  
  issuing amended assessments after the three-year period,                     
  plus extensions, had expired.                                                
  "In February 1984 state auditors issued BP's predecessor,                    
  Sohio, an assessment for 1978 separate accounting taxes,                     
  purporting to amend an earlier assessment issued in 1981 and                 
  which Sohio had appealed.  The three years under section                     
  700(e) of the regulations had expired August 15, 1982.  That                 
  meant the first assessment in `81 was within the three                       
  years, the second assessment in 1984 was after the three                     
  years.  Sohio protested the new assessment, arguing it was                   
  barred by the three-year statute, that was in April 1984.                    
  On October 16, 1984, the Attorney General's Office issued a                  
  formal opinion, asserting that amendments to a timely                        
  assessment could be made, even after the time was up, so                     
  long as the appeal over the on time assessment was still                     
  pending in the Department of Revenue and hadn't made it into                 
  "To my knowledge as a former Commissioner, this 1984                         
  Attorney General's Opinion was the first public assertion,                   
  by any agency of the state of Alaska, of the proposition                     
  that the three-year statute does not prevent the Department                  
  from issuing new claims after the three years are up, if the                 
  appeal is still in the Department.  I can say categorically                  
  that this position now being asserted was not the                            
  Department's position or policy while I was Commissioner                     
  from April 16, 1979 to December 6, 1982.                                     
  "Sometime in late 1984 or 1985 Sohio wrote to Commissioner                   
  Mary Nordale, asking her whether the 1984 AG's Opinion                       
  reflected the position of the Department.  She replied to                    
  the effect that, while it was highly persuasive because the                  
  Attorney General, after all, is legal counsel for the State,                 
  it would not be addressed as a matter of formal departmental                 
  policy until the issue had been presented in due course                      
  through a formal tax appeal, at which time she or her                        
  successor would decide whether, as a matter of policy, they                  
  would seek to go as far as the AG's Opinion said the                         
  Department could go.                                                         
  "In March 1987, Sohio sued the State, seeking declaratory                    
  judgement that the 1984 AG's Opinion was wrong.  The                         
  Attorney General, representing the Department of Revenue,                    
  argued that the courts should not decide this issue until                    
  the Department of Revenue had the chance to take a position                  
  on it.  In making this argument, the Attorney General                        
  pointed to Commissioner Nordale's 1985 letter saying the                     
  question would be formally decided by the Department in due                  
  course through a formal hearing.  Those arguments were                       
  vigorously made throughout the course of Sohio's lawsuit                     
  from 1987 until 1989.  The Alaska Supreme Court decided that                 
  case April 21, 1989.  While noting that Commissioner                         
  Nordale's letter made it appear very likely that the                         
  Department would end up following the AG's Opinion, the                      
  Court agreed with the Attorney General that the Department                   
  had not yet formally taken this position.  And so the Court                  
  ordered the Sohio to go back to its tax appeal in the                        
  Department to find out the Department's position is in due                   
  course.  Now what all this means is this, up until that                      
  decision on April 21, 1989, when the Alaska Supreme Court                    
  decided the case, the Department of Revenue was earnestly                    
  and strenuously arguing to the courts that it had not taken                  
  a position on the interpretation of the three year statute                   
  of limitations.  The Department can't have it both ways.                     
  Either it didn't have a position on the three year statute,                  
  just as it told the courts, which conflicts with what the                    
  Administration is telling you now, or you're being told the                  
  truth now, and it did have a position then and the                           
  Department simply lied about to the Alaska Supreme Court.                    
  "Now I don't actually believe that anyone has been                           
  deliberately lying to anyone about this issue.  And I don't                  
  have to decide whether people were forgetful about things                    
  back in 1989 or whether they are forgetful now.  The fact                    
  is, the Alaska Supreme Court ruled in 1989 that the                          
  Department did not then have a position on the three-year                    
  statute.  If it had ruled otherwise, it would not have sent                  
  the tax back to the Department.  So that question has been                   
  already considered and adjudged.  The Department has a                       
  position it has formally held for less than five years and                   
  is asking you to use that as justification for rewriting the                 
  law retroactively by more than 18 years.                                     
  "In conclusion, BP opposes the retroactive changes to the                    
  statute of limitations for the following reasons.  First, it                 
  won't move the tax disputes any closer to a resolution.  It                  
  only makes a procedural change to allow both sides'                          
  litigation teams to duke it out to the end.  Second, it                      
  won't save the alleged $3 billion from falling off the                       
  table.  Either it has already fallen, or the present laws                    
  have already kept it from falling off.  Either way, SB 377                   
  won't change this.  Third, the legislation usurps the                        
  authority of the Judicial Branch by attempting to dictate                    
  the outcome of litigation pending before the courts.  We are                 
  willing to let the courts decide, despite the State's "home                  
  court" advantage.  Remember, they're 20 plus to 2.  We're                    
  willing to let the courts decide.  Why isn't the State?                      
  Fourth, changing the rules retroactively by more than 18                     
  years sets a dreadful precedent.  If the State does this and                 
  gets away with it, what will keep it from similarly                          
  desperate retroactive measures in the future as it struggles                 
  with the looming budget crunch?  Fifth, it singles out one                   
  single industry - oil - for unfair and unequal treatment.                    
  Sixth, it sends a message to us and to all others who might                  
  invest here that the usual stability one expects in the                      
  United States is not really the case in Alaska.                              
  "Thank you, Mr. Chairman and members of the committee for                    
  this opportunity to testify."                                                
  Number 411                                                                   
  CHAIRMAN VEZEY stated he would forego questions to hear from                 
  the next witness.                                                            
  Number 418                                                                   
  COMPANY U.S.A., gave the following testimony in opposition                   
  of SB 377:                                                                   
  "Mr. Chairman, members of the committee, my name is Tom                      
  Theriot.  I am manager of the Alaska Interest Organization                   
  for Exxon Company, U.S.A.  In this position, I have                          
  management stewardship for Exxon's production interest on                    
  the North Slope of Alaska.  Let me thank you up front for                    
  allowing me the opportunity to testify before your committee                 
  this afternoon.  I am here this afternoon to voice strong                    
  opposition to SB 377 because of the unfavorable statute of                   
  limitation provisions, which were formerly SB 185.  As you                   
  may be aware, Exxon has strongly opposed the legislation                     
  since it was first  introduced in April of last year, for                    
  reasons I'll cite in a moment.  Obviously, we support the                    
  position of the Alaska Oil & Gas Association in opposition                   
  to the bill, and we do appreciate the efforts of many others                 
  from the business community, including some Alaska Native                    
  corporations, and others who have come out in opposition to                  
  this legislation.  Our General Tax Counsel, Mr. Paul                         
  Sullivan, has testified in opposition to this legislation on                 
  two occasions - In April of 1993 before the Senate Judiciary                 
  Committee, and then again in April of this year before                       
  Senate Labor and Commerce.  I have provided copies of the                    
  more expansive 1993 testimony for your reference.  As you                    
  study it, should you have any questions, I'll be happy to                    
  try to answer them.                                                          
  "I'll be very brief this afternoon, and I really only want                   
  to touch on the negative aspects of the legislation from a                   
  businessman's point of view.  As Manager of Exxon's Alaska                   
  production assets, a primary responsibility of mine is one                   
  of ongoing planning and consideration of future investments.                 
  In looking at the legislation from the standpoint of                         
  managing the business and making investment decisions on how                 
  best to develop the oil and gas reserves, this legislation                   
  is bad policy, it sets a bad precedent in the State, and it                  
  sends the wrong signal in terms of the business climate here                 
  in Alaska.  The retroactivity aspects of the bill, back to                   
  1976, are particularly onerous, and certainly erode our                      
  confidence in our ability to do business in the state.                       
  "We recognize this is a business that involves risks, and we                 
  are prepared to deal with what I call the traditional risks.                 
  For example, will the recovery of oil live up to our                         
  production expectations?  Can we reasonably estimate the                     
  investments required to recover the oil?  What is a                          
  reasonable range of future prices that we can expect?  These                 
  are risks we accept and learn to deal with to help us assess                 
  the economic viability of investment opportunities.                          
  "What is very difficult to contemplate are the risks that                    
  materialize for me as a businessman as a result of                           
  legislation like SB 377.  Specifically, what are the tax and                 
  other state rules that affect the project?  When we invest,                  
  can we have the confidence and faith that those rules won't                  
  change?  Or are we at risk that they might change?  Not just                 
  for the future, but maybe for the past too.  It would                        
  clearly be desirable that our investment decisions would not                 
  have to include this added risk - a risk that further                        
  diminishes the attractiveness of that investment.                            
  "Obviously, we need clarity and stability in the legislative                 
  and regulatory climate in fiscal and other matters.  We will                 
  always want that, and will always ask the legislature to do                  
  what you can to help build and create that climate.                          
  "I am aware of some of the concepts that have been offered                   
  up in the committee substitute, that purportedly add                         
  certainty to what taxpayers and investors can expect in the                  
  State prospectively.  Indeed, these provisions may be                        
  beneficial, but at the same time, they are tainted as they                   
  are part of legislation which provides for retroactive                       
  changes to other aspects of the tax law.  While these                        
  provisions lay out some ground rules for doing business in                   
  the future, one would have to question for how long?  A                      
  year, two years, or until the State decides to change them                   
  again?  With passage of this legislation, precedent in the                   
  State would suggest that the policy makers truly don't value                 
  the stability and certainty that the business community so                   
  desperately needs.                                                           
  "For the reasons, I've stated, Exxon strongly opposes                        
  legislation containing retroactive statute of limitations                    
  provisions as currently written in SB 377.  We urge this                     
  committee and the legislature to reject SB 377.                              
  Thank you very much for the opportunity to testify before                    
  Number 471                                                                   
  CHAIRMAN VEZEY stated the House State Affairs Committee                      
  would reconvene at 8:00 a.m., May 9, 1994, thereby                           
  adjourning the meeting at 5:43 p.m.                                          

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