Legislature(1993 - 1994)
05/07/1994 02:00 PM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE STATE AFFAIRS STANDING COMMITTEE
May 7, 1994
2:00 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
None
COMMITTEE CALENDAR
SB 377: "An Act relating to state agency fiscal
procedures, including procedure related to the
assessment and collection of certain taxes; and
providing for an effective date."
HEARD AND HELD
WITNESS REGISTER
DARREL REXWINKEL, Commissioner
Department of Revenue
P.O. Box 110400
Juneau, Alaska 99811-0400
Phone: 465-2300
POSITION STATEMENT: Testified on SB 377
JOHN PILKINTON, Director
Oil and Gas Audit Division
Department of Revenue
550 West 7th Avenue, Suite 570
Anchorage, Alaska 99501-3557
Phone: 276-1363
POSITION STATEMENT: Testified on SB 377
BRUCE BOTELHO, Attorney General
Department of Law
P.O. Box 110300
Juneau, Alaska 99811-0300
Phone: 465-3600
POSITION STATEMENT: Testified on SB 377
PAUL WESSELLS, Vice Chairman
Alaska Oil and Gas Association Tax Committee
121 Fireweed Lane
Anchorage, Alaska 99501
Phone: None Given
POSITION STATEMENT: Testified on SB 377
PREVIOUS ACTION
BILL: SB 377
SHORT TITLE: STATE AGENCY FISCAL PROCEDURES
SPONSOR(S): FINANCE
JRN-DATE JRN-PG ACTION
04/13/94 3633 (S) READ THE FIRST TIME/REFERRAL(S)
04/13/94 3633 (S) FINANCE
04/13/94 3650 (S) FIN WAIVED UNIFORM RULE 23
04/14/94 (S) FIN AT 09:00 AM SENATE FIN 518
04/20/94 (S) RLS AT 06:45 PM FAHRENKAMP
ROOM 203
04/21/94 (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
(REV)
04/22/94 3870 (S) RLS RPT 3CAL 1NR 4/22/94
04/22/94 3876 (S) READ THE SECOND TIME
04/22/94 3877 (S) FIN CS ADOPTED Y12 N8
04/22/94 3877 (S) AM NO 1 MOVED BY KERTTULA
04/22/94 3882 (S) QUESTION: AM NO 1 GERMANE?
04/22/94 3883 (S) AM NO 1 GERMANE Y17 N3
04/22/94 3883 (S) AM NO 1 ADOPTED Y14 N6
04/22/94 3883 (S) AM NO 2 MOVED BY DONLEY
04/22/94 3884 (S) AM NO 2 FAILED Y9 N11
04/22/94 3884 (S) ADVANCED TO THIRD READING UNAN
CONSENT
04/22/94 3884 (S) READ THE THIRD TIME
CSSB 377(FIN) AM
04/22/94 3884 (S) PASSED Y16 N4
04/22/94 3885 (S) EFFECTIVE DATE PASSED
Y17 N3
04/22/94 3885 (S) Pearce NOTICE OF
RECONSIDERATION
04/22/94 3885 (S) TAKE UP RECON ON SAME DAY
WITHDRAWN
04/22/94 3937 (S) RECON TAKEN UP SAME DAY
Y18 N2
04/22/94 3937 (S) PASSED ON RECONSIDERATION Y16
N4
04/22/94 3938 (S) EFFECTIVE DATE SAME AS PASSAGE
04/22/94 3941 (S) TRANSMITTED TO (H)
04/27/94 3746 (H) READ THE FIRST TIME/REFERRAL(S)
04/27/94 3747 (H) STA, O&G, JUDICIARY, FINANCE
05/07/94 (H) STA AT 08:00 PM CAPITOL 102
ACTION NARRATIVE
TAPE 94-55, SIDE A
Number 000
SB 377 - STATE AGENCY FISCAL PROCEDURES
CHAIRMAN AL VEZEY called the House State Affairs Committee
meeting to order at 2:32 p.m. He announced the committee
would be meeting on SB 377, "An Act relating to the
limitations period for certain state taxes, and for
collection of assessment of taxes due the state; relating to
valuation of oil and gas under AS 43.55; adding certain
definitions applicable to oil and gas production taxes; and
providing for an effective date." He noted that there was
HCSSB 377(Fin) as amended. Chairman Vezey said the primary
subject he would like to take testimony on is the
retroactive portions of the bill. He indicated he believes
that is the most controversial aspect that is before the
committee.
Number 039
The first person to testify was DARREL REXWINKEL,
COMMISSIONER, ALASKA DEPARTMENT OF REVENUE. Commissioner
Rexwinkel introduced John Pilkinton, Director, Division of
Oil and Gas Audit, Department of Revenue. Commissioner
Rexwinkel said the department has presented extensive
testimony at prior meetings on SB 377 which part of SB 185.
He noted that the attorney general has provided a
comprehensive document answering many questions relating to
the statute of limitations provision of the bill which was
in a letter dated May 2, 1994. Commissioner Rexwinkel said
the department wants the ability to determine the amount of
tax owed and the ability to also collect that tax. Without
SB 377, the department cannot even determine how much tax is
owed. It is not a dispute of how much tax should be paid
nor is it a dispute about whether the Department of
Revenue's assessments reflect correct or incorrect
application of statute. He said they are not changing or
clarifying AS 43.55 which is a severance tax statute, nor
are they changing or even talking about AS 43.21 which is
separate accounting. Commissioner Rexwinkel said he is not
talking about AS 43.20 which is the corporate income tax.
He referred to AS 43.20 and said the federal IRS laws were
basically adopted.
COMMISSIONER REXWINKEL said SB 377 is intended to clarify
the statutes. Department of Revenue is not changing long
held positions. One statute that is specifically referenced
is the collection statute. The taxpayer doesn't have to pay
the tax until the final determination of the amount of tax
is made. He said the department believes that they should
have six years from that date and not the date of the
initial assessment. It could take years to determine the
final assessment and the taxpayer has many options during
that period of time.
COMMISSIONER REXWINKEL referred to the audit statute. There
is currently a three year statute and sometimes the taxpayer
does give a waiver on that three year statute. He said that
some taxpayers like to say that if the auditors don't
discover or raise an issue within three years from the date
of filing, that the department loses. There would be no
opportunity to raise that issue again or to even discover
the issue. Commissioner Rexwinkel said the department
believes that if they issue an assessment notice in three
years, they have put the taxpayers on notice that the
department disputes their tax return. From that point until
the final assessment is determined, the department believes
that the tax should be able to go up or down depending on
the additional information that is discovered or determined.
He noted that it is consistent with the 1984 Attorney
General's opinion and some of the federal tax law.
Commissioner Rexwinkel said basically the taxpayer in this
case wants a one way street. They want to say that the tax
can only go down and the department believes that should not
be the case. It is not right for the state of Alaska. He
said they can have it that way as the taxpayer only has to
pay the assessment when the assessment notice is issued.
That doesn't mean that they never have a right to get any of
their money back if they believe that the amount was over-
assessed. They can file a claim for refund, but once they
pay the tax, that bars the state from coming in and claiming
additional assessments.
COMMISSIONER REXWINKEL said the one way street is not right
especially when they are part of the problem. He said John
Pilkinton can give detail about some of the problems
encountered during the audit process. Commissioner
Rexwinkel referred to the audit process and said they go in,
do an audit, and there is certain degrees of cooperation
that is received from the taxpayer. Sometimes the
department doesn't have all the information that is actually
needed in order to make a proper assessment. Once the
department issues an assessment, that opens up some
additional lines of communication during the informal
conference period. That is when the amount of the
assessment should be able to be increased or decreased as
the department determines the proper amount of tax. That is
the question at hand, "Should we have the ability to make a
proper determination of the amount of tax and then should we
have the right from that point to collect it?" Commissioner
Rexwinkel said the department urges passage of SB 377.
Number 144
JOHN PILKINTON, DIRECTOR, OIL AND GAS AUDIT DIVISION,
DEPARTMENT OF REVENUE, referred to the proposed committee
substitute and said there is one provision that provides for
an absolute five year maximum on any audit assessments. At
this point, the department thinks that is reasonable. The
companies have made strides in learning how to handle the
production from the North Slope and have learned how to
account for it. He said the provision that has been put in
the bill is a compromise and is probably adequate. It does
cover an issue that the department and companies have had a
problem with in getting in and doing audits.
MR. PILKINTON said one thing that has happened in the past
and continues to happen is the department couldn't even get
in to start an audit for eighteen to twenty-four months
because the companies weren't ready for the department, as
they were dealing with other taxing authorities such as the
IRS or other states. The time was restricted before an
audit could even be started. The department sends audit
requests to companies and it may take them a long time to
get back to the department, the requests may not be
complete. The department has to go back for further
clarifications. Sometimes that has been used against the
department.
MR. PILKINTON referred to the audit process and said it is
an involved process. You're dealing with large multi-
national corporations. He said in recent years there have
been very few amended assessments. Most of the problems
relate to early years. During those early years, there were
many things going on in the world. There were windfall
profits taxes, Iranian and Iraq problems, etc. He referred
to the process the department follows and said from the
audit standpoint, they then move into the appeals part of
the process.
MR. PILKINTON explained the taxpayer has several choices in
appeals. They can accept the audit as presented to them,
they cannot accept it and then they have two routes to go.
One is an informal process which most of the companies have
opted for. There is a series of negotiations to arrive at
the correct tax amount. The second is that they can go to a
formal process which is much more of a court type process.
One of the complaints that has been voiced is that the
department has taken too long to assess the taxes through
the informal process. Mr. Pilkinton explained there is a
regulation on the books, 15 AAC 05.050, that provides that
if at any time the taxpayer isn't happy, they can forget the
formal hearing. They can go to the Commissioner and say,
"I'm not satisfied with this process, I want to move to
formal hearing." He explained that nobody has opted to do
that. If the companies think that the department is taking
too long in the informal process, they should tell the
Commissioner that they want to move on to formal phases.
MR. PILKINTON referred to information he had given the
committee "Oil and Gas Division Historical Information," and
said the last chart is statistical information that is by
the calendar year of the taxes, which shows the number of
taxpayers and the tax dollars collected. He referred to the
number of audits issued in 1978 and said there were thirty-
five audits and there were nineteen amendments. Mr.
Pilkinton said there is still one case in court where there
are two taxpayers from 1978 that still have open tax
periods. He noted that thirty-two cases are closed.
MR. PILKINTON said the final observation about the audit
process and in talking about amendments, 1990 to 1992 the
companies filed 11,257 tax returns. That is for eighteen or
nineteen producers, twenty-eight oil fields in a thirty-six
month period. They filed 3,709 amended tax returns.
Thirty-three percent of the tax returns they filed, they had
to go back and amend. Mr. Pilkinton said from 1993 to date,
they may come back with some more. They filed 3,993
returns. They amended 2,737 or sixty-nine percent. Mr.
Pilkinton said there have been cases where the department
does an audit and the companies are still filing amended
returns. The process is not a simple process for the
businesses and the department. Mr. Pilkinton explained that
they have been working on a regulation process to simplify
many things and it should be forthcoming soon. He urged the
passage of the committee substitute.
Number 257
COMMISSIONER REXWINKEL said there were many things going on.
Oil started flowing down the taps in 1977. At about that
time, the department changed the production tax
requirements. In 1978, a separate accounting tax was
brought on. At the end of 1981, the separate accounting tax
was discontinued because there were some concerns over its
constitutionality. He said he believes around 1986, the
U.S. Supreme Court declined to hear that case, basically
upholding the constitutionality of the tax. Commissioner
Rexwinkel referred to 1982 and explained they once again
changed the production tax statutes to try to make it
revenue neutral with respect to what was on the books before
with separate accounting. All that time, they were doing
regulations to implement tax requirements and were trying to
keep up with it. The department started in 1977 with one
auditor and have built up from there. Some of the years it
has been very difficult to maintain that audit staff in
light of budgetary reductions. He stated that the prices
were fairly stable in 1978, and then we hit the Iranian
revolution in 1979. Oil prices skyrocketed. There were
price controls which lead to a significant amount of oil
being swapped from 105 different crude oils in order to
obtain basically value in excess of the ceiling prices.
Commissioner Rexwinkel said tracking those barrels of oil is
very difficult. There was the Amerada-HESS royalty
litigation settlement that took many years and tens of
millions of dollars to go through that process. It was
based on some of that information that the department gained
that they were able to revise some of the assessments with
respect to the production in separate accounting tax. It
took a long time to get the information and it is not a
simple process. The industries are dealing with the U.S.
Government and many other states. A lot of times there is
even a problem in making arrangements to go in to audit the
companies and getting all the cooperation that is needed to
get information.
COMMISSIONER REXWINKEL said what the department is asking
for is clarification of the statute of limitations and the
ability to make a proper determination of the tax and to
collect that tax. He said they are not changing the tax
structure and they are not changing AS 43.55. They are not
changing AS 43.21. This is not even a discussion about the
corporate income tax which is AS 43.20.
Number 294
CHAIRMAN VEZEY asked the commissioner to explain how they
went through the process and the different trigger dates.
He asked what is existing law and what is being proposed in
the committee substitute.
Number 299
COMMISSIONER REXWINKEL said there is two statutes that is
being discussed. One is a six-year statute of limitations
which says that we need to collect the tax within six years
of assessment. He said the department believes that the six
years begins to run from the date of final determination of
tax. It seems ludicrous that it would begin from the date
of initial assessment, when it takes years to make a final
determination of tax. He said this is not unique to the
state of Alaska, there has been many federal cases that are
being heard. He explained that the time it takes to make a
proper determination on the correct amount of tax is not
unique to Alaska. Commissioner Rexwinkel said companies can
pay the tax up front when the department issues an
assessment notice. They have every right to pay that tax
assessment. If they do, the department cannot any longer
assert any new claims. That basically closes that tax
return. The taxpayer can file a claim for refund and if
they do and they can successfully argue the issues, there is
always an opportunity at that point for the tax to go
downward but not upward. They do have the opportunity to
put the lid on the amount of the tax.
COMMISSIONER REXWINKEL said there is the three year statute
which means from the time the return is submitted, the
department has three years in which to audit the return. He
said often the taxpayer will give an extension of time. It
is almost mandatory because when the department is trying to
audit two or three years worth the periods at one time in
order to gain a lot of efficiencies, the department is just
getting started with the audit process when the statute
would begin to become effective. The taxpayers do give
waivers on the statute. At some point, that process is over
and the department issues an assessment notice. The
taxpayer then has the option to pay the tax or protest the
assessment. Commissioner Rexwinkel said if they protest the
assessment, they also have some further options. They can
request an informal conference, which most of them do, or
they can go into formal hearings. They can also go into
formal hearing at any time during the informal conference
process. They have that right according to regulation.
COMMISSIONER REXWINKEL explained that during the informal
conference period a lot of additional information is
gathered. That helps to make a proper determination of the
tax. Eventually there is a proper determination made.
Number 340
COMMISSIONER REXWINKEL said the department has always had
the position that it is six years from the date of the final
determination of tax to make the collection. MR. PILKINTON
noted that is once the taxpayer has exhausted all their
remedies through the administrative process, as well as the
courts, and not six years from the assessment date which is
what the present statute can be interpreted.
Number 348
CHAIRMAN VEZEY asked what the department is asking to be
able to have after the taxpayer has gone through all the
hearings, appeals, and court actions.
MR. PILKINTON said when the amount has been established
through that whole process, the department is asking for six
years to get the check in hand. It should come immediately
if they have used all of that period, but if the department
has to institute collection action, the department has six
years to do that.
Number 354
CHAIRMAN VEZEY said there is a court judgment and it is his
understanding that there isn't an expiration date. He asked
the commissioner to explain why an additional six years is
needed after it has gone to the U.S. Supreme Court and they
say the tax is owed.
COMMISSIONER REXWINKEL said they have six years to get the
money in.
CHAIRMAN VEZEY asked what happens if they don't pay in six
years.
COMMISSIONER REXWINKEL said they are probably bankrupt.
CHAIRMAN VEZEY said it would seem to him that the department
would have to go back to court to get an extension of the
judgment.
MR. PILKINTON suggested getting testimony from the
Department of Law.
CHAIRMAN VEZEY said the controversy is, we currently have a
three year limitation on tax assessments. He asked when the
three years starts and ends. He also asked what the
proposal is in the bill and how it will change.
COMMISSIONER REXWINKEL explained that the three years begins
from the date the taxpayer files the returns. It is sort of
like filing with the IRS. They have three years to audit
your return. If you don't hear from them in three years,
they don't get to audit your return anymore.
CHAIRMAN VEZEY asked if the department audits all the oil
companies.
COMMISSIONER REXWINKEL said they do audit all the companies
and when they file a monthly production tax return, the
department doesn't audit every month. It would be a
tremendous burden on the oil industry and the state of
Alaska. The department accumulates several returns before
they go in and do the audit. He said they try to accumulate
two or three years worth of returns and by that time they
are bumping against the statute on the oldest return that
was filed. In many cases, the taxpayers will provide the
department with an extension of the three year statute. At
some point in time, the department needs to finish the audit
and issue an assessment notice.
CHAIRMAN VEZEY asked why the oil companies are willing to
grant an extension. The current law is three years. They
could say "no extension" and it would be all over. Chairman
Vezey asked why the companies are willing to grant the
extension.
Number 383
MR. PILKINTON said if they are unwilling or are unable to
get an extension at that point, the department has to file
an assessment based on the best information that is
available. In terminology, it would be called a "jeopardy
assessment." He said they are not out to make the issues as
broad as possible, we are trying to narrow them and that
requires the information. If the department is stonewalled
and doesn't get the information, then the department has to
file on what they have to protect the state's interest.
Normally, the companies will give an extension.
CHAIRMAN VEZEY clarified that the companies and the state
see it in their best interest to mutually agree to an
extension. An unidentified speaker said, "correct."
Number 394
REPRESENTATIVE HARLEY OLBERG asked what the definition is of
"assessment."
MR. PILKINTON said it is the actual letter that goes to the
taxpayer demanding payment for the underpayment amount.
REPRESENTATIVE OLBERG asked if there is a three year limit
during which the department can do that.
MR. PILKINTON said there is a three year limit in getting an
assessment out unless it is extended. It could go beyond
three years.
CHAIRMAN VEZEY asked if the testimony is that it takes a
period of time just to start an audit and the department is
nowhere near the (indiscernible) completed (indiscernible)
normally at the end of three years. Three years is not a
normal audit cycle.
MR. PILKINTON said, "That is correct."
Number 405
COMMISSIONER REXWINKEL said if there is a question about the
length of time it takes to conduct an audit under the
provisions, we have full consideration determinations and
that means looking at contracts. We have prevailing value
considerations and that means, perhaps, looking at what
other oils were sold for. It takes awhile to get that
information as it isn't readily obtainable. There is some
proprietary interest in this information.
CHAIRMAN VEZEY said it is his understanding that they are
referring to Section 8 of the bill. He said it is his
understanding that for tax periods beginning after December
31, 1993. He read from the bill, "(indiscernible) the
amount of tax imposed by this title must be assessed within
five years after the return was filed." He said that is the
new provision that the department is asking for.
COMMISSIONER REXWINKEL said that is correct. Chairman Vezey
said current statute says three years.
MR. PILKINTON clarified that part of the controversy about
the section is that after that three year time period is up
of the issue of the initial assessment, we are in the
informal process. During that time period there are
adjustments to things that have been found and as a result,
amended assessments have been issued. The amendment is the
controversy in this issue, whether the state should have the
right to raise the assessment or lower the assessment during
this informal conference period.
Number 443
COMMISSIONER REXWINKEL said the future provision beginning
with Section 8, Items 2 says, "for periods beginning after
December 31, 1993, there is a five year statute," and it
goes on to say that after that five year period, the
department may not increase an assessment under this
subsection. He said in the future, we are going to be held
to a tighter and higher standard. There will be five years
in order to determine the amount of tax. Things have
changed, things are a lot easier. We are now better able to
track the barrels of oil, we no longer have ceiling prices,
we can determine what some market prices are, we have better
access to information and moving forward in the production
tax area, the department can make that proper determination
in a five year period of time.
CHAIRMAN VEZEY asked why the state wouldn't figure out what
they think is owed and multiply by ten and submit it so they
don't have to worry about going above the number that is
reality.
Number 456
MR. PILKINTON said that is something described earlier, the
jeopardy assessment. He said the department doesn't want to
do that. We can come to the right number and adjust it when
the new information becomes available. He said that is the
right way to do it. It is not right to just throw a number
out there unless you have to.
Number 460
REPRESENTATIVE BETTYE DAVIS said at the present time there
is the three year statute and the five year statute and the
department is saying they are not able to make the
assessments because the department is still gathering
information. The oil companies, at this time, are allowing
the department to extend the time beyond the three years.
She said they are doing that already. What the department
is trying to get changed is that the set three years is
moved to five years from 1993 and beyond.
MR. PILKINTON said that is correct.
REPRESENTATIVE B. DAVIS asked what is going on from 1992
back. She asked where the retroactive part comes in and why
are people saying that what the department is requesting is
unreasonable because they are assessing taxes on something
that has already been settled on.
Number 470
MR. PILKINTON said the department issues that assessment
within a timely period. But from the assessment until a
settlement on a tax, the department finds out additional
information. During the negotiation process, things become
obvious. He said the department lowers the assessment if
they find something in the taxpayer's favor. If something
is found that is not in the taxpayer's favor and is in favor
of the state, we think that the assessment should be
increased. He said the assessment has been increased but
now the companies have come forward and tried to put forward
the defense that they are beyond the three years and the
department is barred from making any adjustments.
REPRESENTATIVE B. DAVIS said the companies have no problem
with the state assessing up to the five year period, but
they do have a problem with the state going back to what has
already gone beyond the three years which they have
automatically extended.
MR. PILKINTON said the companies have problems with the
state in amending those assessments. He said the bill gives
the state a chance to clean up the old tax cases and gives
us five years from now on to take care of any problems in
the department's assessments.
REPRESENTATIVE B. DAVIS asked if the bill passes what would
happen.
MR. PILKINTON said the department is trying to finish cases
through the informal and formal process.
REPRESENTATIVE B. DAVIS asked if everything would then move
from an informal to a formal hearing.
MR. PILKINTON said that is the process that the department
is currently in. He said the taxpayer can force a formal
hearing or as the division finishes their informal
conference decision, then it forces it into a formal hearing
process.
REPRESENTATIVE B. DAVIS asked if the state is concerned now
that the state will lose a certain amount of dollars because
those assessments are not completed that are about to run
out of time.
MR. PILKINTON said because they haven't completed those
assessments and/or that they haven't collected on the six-
year statute.
Number 503
REPRESENTATIVE B. DAVIS said when this is completed, there
will be one statute and it will be a five year statute.
COMMISSIONER REXWINKEL said there will be a five year audit
statute and there will still be the six year collection
statute.
CHAIRMAN VEZEY questioned whether the six years is the
current statute.
COMMISSIONER REXWINKEL said that is correct.
MR. PILKINTON said the part that is unclear in the current
statute is the six years from the original assessment. What
the department says it should be is six years from the time
the taxpayer has exhausted all their rights.
Number 512
REPRESENTATIVE FRAN ULMER said if you strip away all the
rhetoric on both sides and in its simplest form, doesn't
this bill just bless the status quo to the past and in the
future impose a five year limit for assessments.
COMMISSIONER REXWINKEL said that is correct.
REPRESENTATIVE ULMER said when people offer the criticism
that you are "changing the rules of the game" what do they
mean by that.
COMMISSIONER REXWINKEL said what he thinks what they are
trying to say is that somehow we are increasing the taxes in
changing the tax laws. He said we are not changing AS
43.55, the production tax laws. We are not changing AS
42.21, the separate accounting tax laws. We are just trying
to clarify the fact that we want to be able to do what we
were doing in the past and make some changes about how we
are going to do business in the future. Commissioner
Rexwinkel said if the bill is passed, it's not that the tax
assessments are going to automatically increase by some
percentage. He said the department wants the opportunity to
be able to collect on the assessments that are out there.
REPRESENTATIVE ULMER asked if that is dramatically different
from what other states are doing. She said people are
concerned that if we do this it may make Alaska
noncompetitive with (indiscernible) because this is somehow
different from what Texas or other states that are oil
states do.
MR. PILKINTON said he doesn't have some of the comparisons
with him.
Number 533
REPRESENTATIVE BILL HUDSON said it looks to him like there
are a lot of past years where taxes were due, were filed,
were assessed, and were appealed. Now we are running up
against the time frame in which you can't make any changes.
He asked if that is what the oil companies are asserting.
MR. PILKINTON said the oil companies are asserting that the
state can't collect them.
REPRESENTATIVE HUDSON said the oil companies are claiming
that even though they have been assessed... So there is a
value, you have a value and they have got a value and time
has run out and they are saying, "Sorry, you don't even get
to collect our value."
MR. PILKINTON said that is correct.
Number 540
REPRESENTATIVE G. DAVIS said there are amounts on all of
these (indiscernible) and you have apparently gotten a
verbal extension approval by the taxpayers. He asked if any
one company has held the department to the three years and
said, "The three years is up and we do not agree to any kind
of an extension." The answer to this question was
indiscernible.
MR. PILKINTON said in subsequent periods, the department has
found additional information and has gone back and made an
additional assessment based on that new information that
became available.
REPRESENTATIVE G. DAVIS questioned what the additional
information was. He asked if the department found mistakes
in their information or the department's information, or is
there a new theory imposed. He asked if something was found
in the IRS code that could be inserted that might raise the
assessment.
MR. PILKINTON said the IRS code is totally different. He
said the department may be in the process of auditing
company "C" and find transactions between that company and
company "E" that leads the department to a new theory in
discovering something that wasn't known. To protect the
state's rights, the department files an amended assessment.
REPRESENTATIVE G. DAVIS said Commissioner Rexwinkel had
indicated that he would like to simplify the process and
asked if that can be done by the state or is there federal
guidelines and regulations that prohibits the state from
simplifying it.
COMMISSIONER REXWINKEL asked if he means how the department
computes the tax for the future. He said there was another
bill that was introduced in the House, HB 547, and the
department did propose a draft substitute for that which
would change the method of computing the value of the oil
for the future. That would greatly simplify the process
from now in trying to make a determination of full
consideration. He said full consideration is sometimes
tough to determine because there are a lot of interrelated-
type companies and a lot of interrelated-type transactions
between nonrelated companies and it's sometimes difficult to
determine exactly what is being received in light of what
may else be transacted in some other side of a transaction.
He said perhaps we are auditing one company and we come
across some information that gives additional information
with respect to the other company and how they reported the
value of the oil.
Number 577
REPRESENTATIVE G. DAVIS said it is within the state's grasp
without needing any federal legislation or change in federal
regulations.
TAPE 94-55, SIDE B
Number 000
UNIDENTIFIED SPEAKER: "...so that was for how many years
now?"
UNIDENTIFIED SPEAKER: "Year and a half."
CHAIRMAN VEZEY said, "I want to thank both of you for your
testimony. I think we have picked up some very helpful
information. But we do need to try to keep things moving.
I would like to have the committee hear from Attorney
General, Bruce Botelho."
Number 009
BRUCE BOTELHO, ATTORNEY GENERAL, testified regarding SB 377.
He said, "I appreciate the opportunity to speak with you.
I'd like to make some brief comments before I present to you
a recommended House Committee Substitute for CSSB 377."
MR. BOTELHO said, "Representative Ulmer asked whether it was
true that stripped of all of the rhetoric, whether this bill
simply confirmed current practice and change for the future,
the statute of limitations. The commissioner correctly
answered that that was the case. You have focused, Mr.
Chairman, on the retroactivity provision. I think that's
very important. I'd submit that I think Representative
Olberg's question, `What is an assessment?' really is a key
element here. Fortunately, not that we're happy with the
result of what the Supreme Court said, it has provided us an
answer in its recent decision dealing with HB 58. In that
decision the Supreme Court said that we need to know when
the administrative trial begins; what triggers it? To know
where the money goes.
"And the Supreme Court said the answer is that an assessment
is to the administrative trial, like a complaint is in a
civil trial in court. There's a very important element that
the court, making that analogy -- let me explain why,
because it also explains what the historic position of the
Department of Revenue and the Department of Law has been.
There are also statutes of limitations, as you know, in the
whole arena of civil litigation, and, for that matter, in
criminal litigation as well. Some are two years, some are
three, some are six, some are ten. And there are some
cases, capital cases, that have no statute of limitation at
all. And in every case, there is a doctrine that has
emerged in civil litigation, and that is, that if you don't
file your complaint within the statute of limitation, within
two years, you are forever barred from litigating that case.
And the defendant is protected from being attacked at some
later date.
"But there's another doctrine that is equally important,
that is, if you satisfy the filing of the complaint within
the two year period, the courts permit you to file amended
complaints after the two year period. And they have a
doctrine they call relation back; for lawyers, a rather
metaphysical kind of event, that means essentially, that the
amended complaint is as if it were filed on the original
date. And that is the concept you'll find universally, in
every court system in the United States. It was not,
initially, anything found in any statute. You won't find it
in our statutes, either. What you will find in the
rulemaking powers of the Alaska Supreme Court, they have
finally adopted, in the civil rules, copying the federal
civil rules, a specific provision that identifies this
doctrine of relation back...you'd find it at Civil Rule
15(C).
"That brings us now to statutes of limitations on the tax
side. The position taken by the Department of Revenue, and
its practice was, that it had to file an assessment in a tax
year, within the three-year statute of limitations. If it
didn't do so, it was gone forever. But if it did file as it
has, I think, conscientiously tried to do in every case, but
not always succeeding, filed within the three year period,
it would be free to later amend the complaint, the
assessment, and that later amendment would relate back to
the original date. It will have satisfied the statute of
limitation.
"That was the practice with this tax statute, and earlier
ones dealing with individual income tax. We operated under
this very tax regime for nearly 10 years before the issue
was challenged by a taxpayer, Exxon, and they said, `Look,
our interpretation of the law is, that three years is three
years. And your idea that it relates back is wrong. You
have to do it all within the three years period.' That's
the controversy, is one of statutory construction. But, as
I say, it was raised for the first time nine years into the
tax regime that we're talking about here. The issue was
briefed. The initial decision at the administrative level
was that the state position was right. That was appealed to
the Superior Court. The Superior Court reversed [the
decision] and concluded that the state's position was wrong.
That [decision] was in turn appealed to the Supreme Court.
That argument is actually to be heard on May 18.
"But that really isn't the genesis of the controversy. That
led the administration to do two things: (1) to proceed on
the appeal itself; and (2) to introduce, last year, SB 185.
That bill took on not only the three-year statute of
limitations, asked this body to affirm the state's
interpretation of the act, but also to deal with the six-
year statute of limitations on collections.
"Now, the six-year may be a lot easier, it's basically to
say: Look, State of Alaska, you have six years to collect a
tax once you finally know what it is, and once the taxpayer
knows what it is. There was a second case that involved
Tesoro. Tesoro said, `State of Alaska, you assessed the tax
on time, that's not a problem. But it's taken a long time
to go through the administrative appeals and into the
courts. In fact, it's taken more than six years and - ah,
ha! While we owe the tax, because you didn't collect it
within six years of the assessment date, we don't have to
pay.' That went to the Superior Court. The Superior Court
said, `No, you're wrong.' There is also an implied doctrine,
and it's fairly uniform, that the six-year statute can be
tolled, that is, held in abeyance, until the final tax
determination has been made.
"We have a decision from the Superior Court that was
appealed to the Supreme Court and we settled it last year
with Tesoro, after having waited 13 months after oral
argument in front of the Supreme Court, for decision. Both
parties decided it was probably one that we should resolve,
and we did so. That led us then to this legislative
session. There was testimony in the Senate, and I think
correctly so, by taxpayers, saying that one of the problems
we have is there is a lack of certainty; a lack of stability
in our tax policy, to the extent that we don't know when the
assessments are going to come. We need to have some
finality.
"The Administration heard that, and proposed a committee
substitute, the one that is before you today, that would
continue to affirm the state's past position, but make a
correction for the future. That is to say, beginning this
tax year, taxpayers can know that once they've filed, the
state of Alaska has five years within which to issue an
assessment or whatever number of (indiscernible) assessments
to do, but after five years, you haven't done your job,
that's it. State of Alaska, you cannot attempt to raise the
assessment beyond that date.
"We've had discussions with the industry over the last
several weeks regarding this controversy. It has actually
been an opportunity for some wide-ranging discussions that
would try to solve several other long-standing controversies
between the state and the industry. As a result of that,
while I cannot suggest to you that we have reached agreement
with the industry on any set of proposals, we have proposed
and would like to distribute to you now a recommended
committee substitute to this committee substitute for SB
377. With your permission, if I could provide that to your
clerk for distribution."
MR. BOTELHO provided a copy of the CS to the clerk for
distribution to the committee.
MR. BOTELHO explained the CS. "This proposed CS does
several things. First of all, it focuses only on the oil
and gas issues. Thus, it differs from the bill presently
before you in the respect that it deletes all non-statute of
limitations issues from it. That is the first difference
between the bill the committee has and our proposed
recommendation."
CHAIRMAN VEZEY asked him to repeat his remarks and Mr.
Botelho did so.
MR. BOTELHO continued, "It has the retroactivity provisions,
both for collections and for the statute of limitations on
assessments; that is to say, affirming the Administration's
long-held positions on both. It incorporates the five years
for the future. And here are the add-ons that come with it:
"One of our major sources of dispute with the industry has
been over the treatment of gas liquids. We are proposing
definitions that would make clear that the gas liquids at
issue are gas rather than oil. This is a major concession
on the part of the Administration in the sense that we have
argued at length that these liquids should be treated as
oil, and therefore taxed at a higher rate. The proposed
language in this definition will treat them as gas. The
second feature, focusing on the concern about stability and
finality, is a provision which would allow the Department of
Revenue to adopt regulations setting a methodology for oil
valuation. Very much like what we have done in our various
royalty settlements - we actually have three major
settlement methodologies on the royalty side, one each with
Exxon, BP, and ARCO, and then remaining producers on the
North Slope are able to select among those three. We would
like to see, and the Department of Revenue has been working
at great length with the industry, to come up with a set of
regulations satisfactory to all.
"We would further be proposing a similar approach to gas
valuation. Again, our efforts are aimed at providing
certainty to the industry and to the taxing authority in
trying to calculate what the obligations are. Various
sections of this bill will have different effective dates.
The retroactivity provisions dealing with the statute of
limitations will go back to the inception of the statute.
The definition with regard to gas processing plant, the key
to the question of this gas liquids, would be retroactive to
1987, and that will have a consequence of some substantial
tax credits to producers.
"We urge the committee to put, and our version reflects it,
a different effective date on the oil valuation methodology.
That is, it should kick into place as soon as we have
resolved with the remaining taxpayers, all disputes dealing
with separate accounting. That was the tax that was in
effect between 1978 and 1981. We believe that by doing so,
the legislature will create a great incentive to early
resolution of the remaining cases. We have four pending
right now of the original, I think 40, taxpayers that were
involved. This is what the Administration would recommend.
To accomplish this, it would also be necessary for the
committee and for the body to adopt a resolution amending
the title that will require a two-thirds vote of each body.
We have prepared such language."
MR. BOTELHO sought out the clerk for distribution of the
amended title language. "Finally, we have prepared a
sectional analysis for the committee so that it would have
an opportunity to review, perhaps, in less pressing moments,
an opportunity to understand what this bill is about."
Number 208
A clerk became available and was given the title information
for distribution.
MR. BOTELHO concluded his remarks by saying he was available
for questions.
Number 214
CHAIRMAN VEZEY said, "The first question I'd like to ask,
Mr. Botelho, and you may not have great knowledge here so
don't feel that you have to pretend you do, but I happen to
remember that in the 70s -- the state of Alaska has been an
oil-producer for about a quarter of a century. In the 70s
we brought experts from all over the world up here. These
statutes were not thought of by a bunch of people who had
never been involved in oil. This was put together by some
of the best minds in the country under the auspices of the
legislature that very much wanted these tax revenues. Why
are we having so much difficulty in defining terms? The oil
industry has been producing oil for a century in this
country."
Number 223
MR. BOTELHO responded, "I think it's a very good question
and also a difficult one to answer. I think that it is
reflected in part by the fact that you really are talking
about at least three different periods in our state history,
if we just talk about the last, say, 18 years. The statute
of limitations issue really evolved in 1976; if you look at
the legislative history there's almost none because it's
described as simple housekeeping. 1976 also marked the year
that we started dealing with legislation on separate
accounting and revisions to the production tax that carried
over to 1977 and 1978. We had the lawsuit that was filed in
1979 by the producers, challenging the constitutionality of
separate accounting, and that lead this body then to abandon
it in 1981 in favor of what's called modified apportionment.
"But to be more specific, there were a lot of experts.
There were specific recommendations made. They invariably,
as part of the political process, were modified. They were
under constraints of time, the legislative pressures,
modifications made in committees, modifications made on the
floor. And as is often the case, particularly in the tax
arena, the final ingredient is the willingness of the
legislature to delegate authority to the commissioner of
revenue to adopt regulations. In fact, I would say a good
portion of the battles that have taken place over the
statutes or over the tax scheme have been over the
regulations. Do the regulations comply with or are
supported by the underlying statutes. I would tell you
that when lots of money is at stake it is an issue worth
litigating between the state and the taxpayers, and done in
good faith on both sides. I think the human experience is
that when there's a controversy over lots of money people
are willing to fight very hard. That's not to detract
either side... I think that explains - - You set up a fairly
broad scheme, you leave it to regulators and administrators
to adopt regulations, again, their primary view is to
maximize returns to the state consistent with the law, and
taxpayers who challenge whether the administrator had the
authority to do so."
Number 263
CHAIRMAN VEZEY said, "Thank you. You do seem to be quite
familiar with how we got to where we're at. But all these
other 20, 25 oil producing states in the nation, they've
been assessing oil since before the turn of the century,
certainly since the 20s in a big way, why do we have
questions in law over things like the definition of `three
years from assessment'? Why do we have questions in law
about `six years for collection'? These terms have been
around for a long time."
Number 271
MR. BOTELHO commented, "They have, Mr. Chairman. Again,
that's why we're fairly confident about prevailing in the
Supreme Court. The difficulty is you have judges who are
literalist. You have judges who are very aware of these
doctrines, not written down, but which are accepted, like
relation back. And so you can come up with legitimate
differences. As I indicated to you, we don't have a
legislative history on the three- and six-year statute of
limitations here. So it becomes an opportunity to litigate.
There is a lot of money at stake as well. Having said that,
I don't want to suggest this is a grab for a tax break by
industry. They are legitimately frustrated at the same time
with the length of time it has taken to resolve these tax
disputes. Coupled with a good argument to be made on the
statute of limitations, there is an equitable side to it as
well, which is saying, `Enough is enough, this has dragged
on long enough, we may be responsible for part of it, but
the state is as well," and we're going to put it to the test
right now."
Number 292
REPRESENTATIVE HUDSON asked, "Mr. Attorney General, it seems
like the adoption of regulations appears to be one of the
major elements in the revisions we have here, in order to
develop the stability and finality that the oil people are
claiming that they don't have at the present time. Can you
amplify that just a little bit? How are they developed so
as to satisfy, for example, the industry?"
Number 300
MR. BOTELHO responded, "The Commissioner and Director
Pilkinton, along with the staff of the Department of Law,
have been engaged in a cooperative effort with members of
the (indiscernible) tax committee, and that effort has been
going on for several months. We have set a goal of early
June in reaching agreement. We have six different working
groups in six different tax issues working towards
resolution. I think you would find that, without exception,
the industry indicating that we've made great strides
towards reaching consensus. We're not all the way there,
but I think the attitude both within the Administration --
I'm talking about the audit and attorney level, the line
people -- feel comfortable about the direction we're going
as well. But most importantly I think the industry has been
pleased that we've stepped up to the plate to try and solve
issues that we have previously lobbed grenades back and
forth over in the last several years.
Number 318
CHAIRMAN VEZEY asked, "Before we take any more questions,
Mr. Botelho, would it be your interest to go through this
proposed committee substitute and different sections and
explain the whole bill? Would you like to explain the
differences? How would you like to...?"
Number 322
MR. BOTELHO said, "Mr. Chairman, I know you're under a great
time constraint here. I would be glad to do just a very
brief overview, if that would be helpful, or to continue
answering questions at your pleasure."
Number 326
CHAIRMAN VEZEY responded, "If you would, let's please do a
brief overview first so we'll have a little more of a basis
for where we're at."
Number 327
MR. BOTELHO stated, "Section one is important from the
standpoint that it sets forth the basic findings for this
legislation and it focuses on the statute of limitations
issue. First, again, affirming that the state's
interpretation about the three years, that is, the relation
back doctrine, has been the correct interpretation, and,
secondly, that with regard to the six-year statute on
collections, that the state has six years from the time
there has been a determination about how much is owed. The
findings also specifically address the fact that industry
has expressed concern about the lack of finality, and that
is the justification to going to a five year prospective,
beginning this tax year, statute of limitations after which
there would be an absolute bar.
"Section two is the reaffirmation in language to the three-
year statute, to make clear what we believe has been the
case all along, that the state is free to amend the
assessment after the three year statute has taken place.
"Section three is on the collections, six-year statute.
While there is an appeal pending, the six year statute of
collections is on hold, and until their final determination
is made on the tax, the state clock does not start running.
"Section four refers to the proposed valuation methodology
for the future on oil, and provides that the department
shall adopt regulations. The regulations we're talking
about, the sidebars that are found in this, are really the
sidebars we have already negotiated in the regulations
project with the industry.
Number 366
CHAIRMAN VEZEY interjected a comment: "Section four is
rather long, and I'm sure there's more not here than here."
Number 367
MR. BOTELHO said, "That's right, and I misspoke, also, Mr.
Chairman. Section four also includes a section for
prevailing value for gas. This has been a concern,
particularly for certain Cook Inlet producers, and we've
been working with -- Our goal has again been to adopt
regulations which will provide them similar certainty.
Their primary interest is to see the royalty valuation
methodology adopted, and we have left that as an option.
We're still, I think, frankly, in discussions, with them.
"The next substantive section, and I think the meat of the
bill -- actually Section five and Section six are those
dealing with the gas processing plant, the combination of
what to do with gas liquids. They really are tied together,
though, the consequence of which is to permit those liquids
to be treated as gas rather than oil, and therefore, be
taxed at a lower tax rate. This language has been the
result of some fairly intense negotiation with industry over
exact language, and I think reflects the industry's views.
"The remaining provisions are effective date provisions and
what we believe is a very important clause here, the
nonseverable provisions; important, because we see this as a
package deal, one that we believe may be seen retroactively
as being somewhat punitive, though, as we say, we see it as
simply an affirmation of our current position, but one which
prospectively should be of great incentive and great
interest to the industry as well as to the state in
narrowing differences, eliminating controversies where we
can, and obviously, in a couple of respects, actually having
direct monetary benefits, tangible benefits to the industry
now."
Number 408
CHAIRMAN VEZEY interjected, "If we can, briefly, go
back...[in] Section four I believe I heard you comment that
that had been worked out in consultation with the industry?"
Number 412
MR. BOTELHO explained, "Mr. Chairman, that is correct. The
language that we have here is largely language that we
received from the lead taxpayer. It probably would not be
inappropriate to indicate that this is language that had
been originally proffered by BP in discussions with the
state, and is language that ties in directly with language
that AOGA has proposed jointly with the state in the
regulations project that the commissioner spoke of earlier.
So this basically is a direct authorization for the
regulations which the department would intend to adopt later
this summer."
CHAIRMAN VEZEY commented, "And Section seven makes the,
well, Section two, which is the tax assessment period
retroactive to January, 1976."
Number 431
MR. BOTELHO said, "Yes, that is correct, Mr. Chairman, and
that date is the effective date of the initial legislative
act creating the three-year statute of limitations on
assessments, and the six-year statue of limitations on
collections. There are two other retroactive provisions,
Mr. Chairman. Section eight, which is the retroactive
provision for the gas liquids issues, and which would have
the consequence of retroactive payments, in essence, to the
industry; and the final, key departure from the normal
effective dates, is our proposal that the oil valuation
methodology statute not take effect until we have resolved
the remaining separate accounting cases. As I said, we
suggest this primarily as an incentive to those taxpayers in
the state to reach early resolution, because the benefits
prospectively on a fixed methodology, we think, are of great
value, both to the industry and the state."
CHAIRMAN VEZEY thanked Mr. Botelho and asked if there
questions for him. Chairman Vezey recognized Representative
Ulmer.
Number 457
REPRESENTATIVE ULMER said, "You know, Bruce, most
legislators want to be fair to both the oil industry and the
people of the state, and want to strike a balance, and I am
glad you are proposing a CS for us to consider, but I want
to return to the second question that I asked the
commissioner of revenue. How different are we from other
states? Because one of the things that we hear a lot is
that if the state of Alaska adopts this legislation, that
we're somehow sending the signals to industry that this is
not a friendly place to do business, and that we may be
somehow discouraging the industry here. I don't think this
legislature wants to do that, and that's why I'm curious,
how different is the way in which we treat the assessment,
the tax collection, and the retroactivity that we've been
discussing - how different is that from other states and
other oil jurisdictions? And if you can't answer that
today, I would appreciate that answer at some point because
I think it is relevant to the issue of whether we're being
fair or unfair."
Number 475
MR. BOTELHO commented, "I think that's an important
question, and it's one I think all of you have raised at one
point or another, individually, and appropriately so. Our
tax structure, that is to say, first, how we resolve tax
disputes, is one of three major models used by all the
states. You have some states that have tax courts rather
than an administrative tribunal within the Department of
Revenue or sometimes called the Department of Tax, or
Taxation, or Franchise Board. You have a third model, which
is an administrative body, but placed somewhere outside of
your tax collecting agency itself. Alaska is very much
within the norm there. With regard to the statute of
limitations, ours is very similar and, as I said, the
doctrine of relation back is one that is generally accepted
around the country and in that sense I think quite fair.
There is no doubt that by asking you to say that
retroactively we are right, is something unusual, especially
to carry back this far. The law, I think, is clear, and I
think if you were to ask your legislative counsel, they
would advise you, as our own research has shown, that you
clearly have the authority...there are no constitutional
impediments.
"The fact that there are delays in our tax system that drag
out so long are actually also fairly typical. When we were
before the Senate Labor & Commerce Committee, that very
question was asked. Staff for the committee made inquiry to
other oil-producing states which responded that they too had
cases that were dragging on. We've got examples, in
California, I think, of a recent settlement that went back
to 1962. It's not unusual when you're talking about the
hundreds of millions of dollars at stake, they're the
largest kinds of cases you'll find in any court system, they
will be strenuously litigated. You'll find the best lawyers
in the country fighting on both sides, frankly; that tends
to drag these out. And it's simply a recognition that
probably the length of time will be directly proportional to
the amount at stake and the complexity of the issue. That,
I think, is what we've been faced with here.
"The most difficult part, though, is I think the key
question: what message are we sending? This Administration
sees that the industry is a key ingredient to the state, and
that it's in our interest to make sure that it is as healthy
as it can be, and that we ourselves contribute to that. In
that regard, it is important to try and bring the past to a
resolution as quickly as possible. It is also fair to the
people of the state, that we collect what we're fairly owed.
Not a dollar more, but probably not a dollar less, either.
And I think the industry appreciates that. I will tell you
that I have dealt with, I think, virtually every major
producer in this state, and I've never heard a company say,
`We want to pay less than what we think we owe.' I think
for the most part they have been very receptive, and they
understand that there is a process for resolution. But
we've also allowed years to drag out, here, and it's become
a thorn to the industry. Our goal has been to try and force
it to resolution. Our view had been that with passage of
the bill it would force the remaining taxpayers -many of
them have paid up all those taxes that might be affected by
statute of limitations, but there are some who have not - by
passing the bill it would force us to bring it to early
resolution rather than waiting a month, or several months,
or a year, for a Supreme Court decision.
"The final analysis is really it's a state of mind. Can the
industry see that what we're trying to do is clear up the
past and also remove impediments to certainty for the
future? And I think the committee substitute that we
proposed is really one that deals frankly, forcefully, with
the past; it provides us with some pressure to bring it to
resolution; it creates some incentives to bring it to
resolution; but, finally, make some changes that will
benefit the entire industry and bring certainty, even those
that we're not otherwise in contention with right now. And
the five year statute does that. The definition that deals
with gas liquids, providing a methodology in the future for
oil and for gas, will go a long way to eliminating a battle
generating today that we'll be duking out ten years from
now. It won't have to happen again. We don't want it to
happen again.
"Mr. Chairman, again, I know I've taken up a lot more time
than you had hoped. I appreciate the opportunity to address
you."
Number 587
CHAIRMAN VEZEY thanked Mr. Botelho for his testimony. "I
would like to clarify, if this was to become law, you're not
thinking that we would not be auditing all of these
companies, still?"
Number 591
MR. BOTELHO said, "No, Mr. Chairman, I think the level of
auditing goes to a whole different realm. My sense would be
that there would not be a need for the massive amounts we're
spending on litigation. I think it might mean some
reduction in staff, it would certainly mean for the
Department of Law elimination of outside counsel. We
obviously still have a backlog to clean up, and it's going
to be a couple more years before we've accomplished that.
But you have great leadership in the Department of Revenue.
They've made great strides, I think, in catching up on the
more recent years, so we will not see the gaps. We're
fighting history, right now. And we have a chance to
eliminate duking out 1978, 1979, 1980."
Number 611
CHAIRMAN VEZEY again thanked Mr. Botelho for his time,
saying he knew he had a busy schedule and needed to leave.
Mr. Botelho thanked Chairman Vezey once again.
Number 616
REPRESENTATIVE B. DAVIS asked, "Mr. Chairman, is it your
desire that we move the CS?"
CHAIRMAN VEZEY responded, "Not at this time, Representative
Davis. We have a number of people who would like this
opportunity to testify. The Senate was kind enough to let
us have this room until 4:00. It is 4:00. The Senate
doesn't seem to be wanting the room quite yet, so I'd like
to continue the meeting for a little while, though we are
supposed to go in session at 4:00. So I think we have maybe
a few more minutes. But not terribly many. We had several
people sign in to testify. I can't find my sign-in sheet at
this time. But one of the names I do remember was Mr. Walt
Furnace. Are you still with us, Mr. Furnace? He's not with
us right now? He was. Okay. Would someone who has signed
in to testify - let's see, here's one right here. This is -
there we go. I'm sorry? Representative Kott? I can't
read this one. This Mr. Paul Wessells? Is Mr. Paul
Wessells here? Mr. Wessells?"
TAPE 94-56, SIDE A
Number 000
CHAIRMAN VEZEY said, the committee understands that you
probably have not had a chance to review the committee
substitute before us, so we'll understand that.
PAUL WESSELLS, VICE CHAIRMAN OF THE ALASKA OIL AND GAS
ASSOCIATION (AOGA) TAX COMMITTEE, testified on behalf of the
committee. He said, AOGA's trade association, whose 18
member companies account for the majority of the oil and gas
exploration, production, transportation and marketing
activities in Alaska. Those provisions of SB 377 that would
amend the three-year statute of limitations on assessments,
that is AS 43.05.260, and the six-year statute of
limitations on collections of tax, that is AS 43.05.270,
would retroactive affect to January 1, 1976, are in
substance the same provisions contained in SB 185. They
were added to SB 377 as a floor amendment in the Senate.
AOGA testified strongly against SB 185 during the hearings
by the Senate Labor and Commerce Committee on March 22 and
April 7 of this year. Rather than repeat those comments
before this committee, Mr. Wessells distributed copies of
that testimony to committee members for their review.
MR. WESSELLS said for the reasons given in that testimony,
AOGA opposes those provisions, i.e., the retroactive
provisions. They represent bad policy for the state of
Alaska, enacting them will be a terrible precedent, and will
send a hostile message about Alaska to those who are already
invested here and those who might be thinking about it.
MR. WESSELLS thanked the committee for the opportunity to
testify.
Number 050
CHAIRMAN VEZEY said he thought everyone in the room was
concerned that we do have vast untapped oil and gas
potential in the state of Alaska and nobody wants to see us
run those people with the capital and the technology out of
the state of Alaska, but at the same time, there's an
ultimate fairness, and that's what we're searching for.
Number 059
REPRESENTATIVE HUDSON asked Mr. Wessells if he had seen and
if his comments were based on the revised elements that were
brought forward by the Attorney General just recently.
MR. WESSELLS responded no, they were not. He said he was
testifying on behalf of AOGA, who has not taken a position
with respect to those items.
CHAIRMAN VEZEY said he would not expect that the Board of
Alaska Oil and Gas Association would not have had time to
review this committee substitute.
Number 069
REPRESENTATIVE ULMER asked Mr. Wessells if he would answer
the two questions that she had asked of the commissioner of
revenue and the attorney general. First, doesn't this
simply bless the status quo. When you say it's a terrible
precedent, it seems that your interpretation is that this is
changing business as opposed to the Administration's
testimony that it is continuing the status quo. Second,
does this make Alaska significantly different than other
states where we have oil development and oil taxation and
the difference between Alaska and those other states, making
us perhaps less competitive, the message, issue that you
were raising, is this so very different from other states.
MR. WESSELLS responded on the first item of status quo, he
thinks that what is referred to today as the status quo, is
referring to a method of operation that the Department of
Revenue has followed for a number of years. He said, "It's
not clear that is correct under the law of these particular
statutes of limitation. In particular, the three-year
statute of limitations on assessments, is a subject that is
before the Supreme Court presently for a decision and
presumably, if it's there, then there is some controversy
about whether this practice is correct or not. So, I can't
really see that it would be something regarded a status quo,
or an accepted status quo."
Number 100
REPRESENTATIVE ULMER said, "You're saying it may not be
legal in the sense that the court may throw it out, or may
not interpret it the way the Department of Revenue has used
it. My question is do you disagree that that is what has
been the practice in Alaska for at least 10 years. In other
words, I'm trying to get at this issue of `are we changing
the rules, or is this how business has been done for 10
years in Alaska,' I'm trying to get some help with that
question."
MR. WESSELLS responded that the practice that's referred to
here is the status quo being an interpretation of the three-
year statute of limitations which says that it is suspended
during the course of an appeal by a taxpayer of an
assessment, and indeed, that has been the interpretation
which the Department of Revenue has placed on that statute
during this period of time. He further stated, because they
have interpreted it that way does not mean that the
taxpayers who are subject to these taxes necessarily agree
with that interpretation. So, it has been an issue of
controversy for some time and this bill attempts to settle
that controversy, legislatively, on the presumption that
this is an accepted practice and this is what the law really
means and really is, rather than having that particular
controversy decided by the Supreme Court. Mr. Wessells said
if what you mean by the status quo is a practice that the
Department of Revenue is undertaken, I think that is
correct. But speaking for the members of the Alaska Oil and
Gas Association, Mr. Wessells said they don't believe that
is a correct way to operate.
In response to Representative Ulmer's second question
regarding how Alaska differs from other states, MR. WESSELLS
said he couldn't speak for all the members, because he
hadn't polled them on this particular question; however,
speaking for the company that he is employed by, which is
British Petroleum, he said at present they do not have any
controversies with any other state that are as old as the
ones that they have with the state of Alaska, nor have been
as long-standing as these and stated he thinks that for the
preponderance of the membership of the Alaska Oil and Gas
Association, that is true, as well.
Number 143
REPRESENTATIVE ULMER said, "But you're not sure if the law
is significantly different in those other states than what
Alaska is proposing here that might make us look very
different to the oil industry."
MR. WESSELLS responded he didn't think it's really a
question of whether the law is different so much as it's the
practice of determining tax liability and the procedures
that are followed by the Department of Revenue in
determining that liability, which causes the process to be
protracted, very difficult to draw closure on and it is that
particular problem which sticks out in the minds of people
when they think about doing - at least the people in his
company - when they talk about doing business in Alaska.
It's the question of clarity and closure on the
controversies regarding taxes that go back as far as 16 or
17 years. That's the problem.
Number 160
CHAIRMAN VEZEY said one of the questions that keep coming up
in his mind is some, if not most of these problems have
existed back to 1978 when the tax (indiscernible) was
enacted, there are tax statutes that have been amended, he
thought eight times during that course of time, most of them
more than a decade ago, why this impetus for this change
comes up now after all these periods of years? He said he's
starting to get the impression it's because we've not been
able to resolve all these very old disputes. He asked Mr.
Wessells to comment on why this is all of a sudden coming
up, when we've not hesitated in the past to go in and change
the tax codes, and now suddenly we feel we need to change
the retroactive portion, which we didn't bother to address
in the eight previous changes.
MR. WESSELLS said he could only speculate about that because
he's not the party that's proposing the change and thought
the question needed to be directed to someone else. He
stated he didn't feel it was appropriate for him to
speculate on that motivation.
Number 182
REPRESENTATIVE HUDSON asked Mr. Wessells the same question
he asked the Commissioner; that is, under current law, the
statute of limitations is three years, in which the
department can assess and change assessments and things of
that nature, and then it halts. He asked, "Is there in any
other state, to your knowledge or even here, is it all or
nothing at all at that point in time. That is, if the
matter hasn't been fully settled, does the oil industry owe
nothing, does the company owe nothing, or do they owe at the
least, what they filed?"
MR. WESSELLS said absolutely. He said, "The process as it
works is a taxpayer prepares and files a return as of a
certain date. This three-year statute that we're talking
about begins to run so to speak, as of that date, it is
three years from that time that the Department of Revenue
can assess, that is make a claim and a demand for payment of
additional tax. What we're talking about here is additional
tax. It is that that the three-year statute refers to. So,
it's not a question of taxpayers not paying anything,
they've indeed paid quite a lot."
Number 204
REPRESENTATIVE HUDSON said that was what he was asking
before, and he got the impression that it was all or nothing
at all. That's been his big concern. He said, if he was
understand Mr. Wessells correctly, up to the three years,
the initial taxpayer's filings and the various increases
that are assessed by the department, puts a value that the
department claims and puts a value that the company claims
and is there any chance that the value at least that the
company claims, is going to be lost to the state? The state
is not going to lose everything?
MR. WESSELLS commented that if Representative Hudson's
understanding was, for instance, taking a particular tax
period of one year, a taxpayer files its return and pays the
tax as reported on that return, because of these statutes of
limitations (indiscernible), it does not mean that the
taxpayer can get that money back if they run. That money
has been paid in and that cannot be recovered, unless the
taxpayer files a claim for refund of that money. He said,
"In this three year assessment, we're talking about claims
for additional tax owed or claimed to be owed by the state,
in addition to those that were actually reported in the
return."
Number 223
REPRESENTATIVE HUDSON asked about the six years. He said,
"we're out here three years, the state's got a value, the
company's got a value, there's a period of time where
apparently, at the end of the six years, then is there a
chance that under existing law, the state could lose
everything?"
Number 227
MR. WESSELLS, responded no, it would only lose those amounts
that were included in the assessment that was made within
the three year period.
REPRESENTATIVE HUDSON commented that was different than what
he understood from the department.
Number 231
CHAIRMAN VEZEY asked Mr. Wessells if he had any insight
regarding his comment that he was not aware of any other
state that has this kind of backlog of audits and
assessments.
MR. WESSELLS said in his experience, yes.
CHAIRMAN VEZEY asked Mr. Wessells to comment or elaborate on
that.
MR. WESSELLS stated that he was familiar with the
controversies here in Alaska. He stated, "In our particular
experience with my company, we've had controversies with
other states, but they've not, in the time that I've worked
for the company, I'm not aware of any that have gone on as
long as 10 to 15 years. That's all I can say."
CHAIRMAN VEZEY thanked Mr. Wessells for his testimony.
CHAIRMAN VEZEY adjourned the meeting at 4:16 p.m.
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