Legislature(2003 - 2004)
05/01/2003 07:08 AM House W&M
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
May 1, 2003
7:08 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Jim Whitaker, Co-Chair
Representative Cheryll Heinze
Representative Vic Kohring
Representative Bruce Weyhrauch
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Norman Rokeberg
OTHER LEGISLATORS PRESENT
Representative Ralph Samuels
Representative Paul Seaton
Representative Dan Ogg
Representative Harry Crawford
Representative Kelly Wolf
COMMITTEE CALENDAR
HOUSE BILL NO. 293
"An Act levying and collecting a state sales and use tax;
and providing for an effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 293
SHORT TITLE:STATE SALES AND USE TAX
SPONSOR(S): WAYS & MEANS
Jrn-Date Jrn-Page Action
04/30/03 1202 (H) READ THE FIRST TIME -
REFERRALS
04/30/03 1202 (H) W&M, FIN
04/30/03 1202 (H) REFERRED TO WAYS & MEANS
05/01/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
WITNESS REGISTER
LARRY PERSILY, Deputy Commissioner
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Testified on HB 293 and answered
questions.
DAN DICKINSON, Director
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Testified on HB 293 and answered
questions.
ACTION NARRATIVE
TAPE 03-20, SIDE A
Number 0001
CO-CHAIR JIM WHITAKER called the House Special Committee on
Ways and Means meeting to order at 7:08 a.m.
Representatives Hawker, Whitaker, Heinze, Kohring,
Weyhrauch, Wilson, and Moses were present at the call to
order. Representative Gruenberg arrived as the meeting was
in progress. Representatives Samuels, Ogg, Seaton,
Crawford, and Wolf were also present.
HB 293-STATE SALES AND USE TAX
CO-CHAIR WHITAKER announced that the only order of business
would be HOUSE BILL NO. 293, "An Act levying and collecting
a state sales and use tax; and providing for an effective
date."
Number 0055
CO-CHAIR HAWKER moved to adopt HB 293, Version 23-LS1064\D,
as the working document. There being no objection, Version
D was before the committee.
Number 0122
LARRY PERSILY, Deputy Commissioner, Office of the
Commissioner, Department of Revenue, testified on HB 293
and answered questions. He told the committee that this
[bill] is a starting point for a sales and use tax, but it
does not include any of the exemptions that were discussed
in previous legislative sessions. For example, he said,
some of the exemptions that were discussed were for medical
care, prescription drugs, food. Furthermore, [some of the
exemptions had] caps such that the tax would only apply to
a certain amount of the purchase. He emphasized that this
[legislation] is a starting point from which members can
make policy decisions that will determine how the
legislature wants it implemented, what will be taxed, and
if exemptions will be offered. The sales and use tax
[bill] would [delineate] the administration, enforcement,
and collection of taxes. He said [the administration]
believes that if a sales tax is to work in the state of
Alaska, and work for businesses that are going to be
collecting the tax on the state's behalf, there needs to be
one set of laws and exemptions; one central point of
enforcement and collection; and audits so [businesses and
municipalities] are dealing with just one taxing entity
rather than 98 different taxing entities between the
communities, boroughs, and the state.
MR. PERSILY emphasized that the fiscal note is only an
estimate, not a science. He said that the Department of
Revenue (department) believes that if there is a sales and
use tax without significant exemptions, caps, or other
measures that would detract from the gain of revenue, there
would be roughly $110 million dollars for every 1 percent
of a statewide year-round sales tax. HB 293 proposes a 3
percent sales and use tax, so there would be about $330
million per year in revenue to the state. The first fiscal
year would take effect on January 1, 2004, and tax returns
would be due the next month so the state would get 5 months
worth of tax returns in FY 04 [which would amount to
approximately] $135 million in revenue and $330 [million in
the next year]. As the economy continues to grow, that
number would grow with it. Mr. Persily pointed out that
fiscal notes do not take into account growth or inflation.
He directed attention to page 2 of the fiscal note where
some of the exempted items are listed. These are
exemptions that the [administration] believes are essential
to making [the legislation] work and giving it the clarity
that is needed. For example, there are exemptions for
items such as sale for resale, which means the sales tax is
[only] collected at the final end purchaser at the retail
point not at every step of the way. Some other common
sense exemptions are ingredients or components used in
manufacturing and mining, sales to or by government
agencies, and purchases with food stamps, WIC (Special
Supplemental Nutrition Program for Women, Infants and
Children) coupons, wages, dividends, and interest.
Number 0521
MR. PERSILY told the members that the department strongly
recommends that if Alaska adopts a sales and use tax that
it conform to the Streamlined Sales Tax Project
[Streamlined Sales Tax Agreement Project]. He explained
that this is a nationwide effort to adopt a simplified
approach for customers and businesses. As nationwide trade
in Internet sales, phone, and mail orders continue to grow,
states have realized that there are significant amounts of
money lost to those sales tax revenues. Part of the goal
is to come up with nationwide standards so that it would be
easier to work with the business community, thereby
allowing the state to start collecting those sales tax
revenues.
Number 0647
DAN DICKINSON, Director, Division of Taxes, Department of
Revenue, testified on HB 293 and answered questions. He
provided the following testimony:
We administer 19 different tax types, and I'd
like to take a couple of minutes to talk about
one important aspect of a tax that Alaska doesn't
have - and that is the Streamlined Sales Tax
Project. What is the Streamlined Sales Tax
Project and what could it mean for Alaska? It
will increase the likelihood that we can get out-
of-state businesses to collect sales taxes for us
on their sales into Alaska. It gives us a
precise framework for simplicity, fairness,
uniformity, and certainty - all worthy goals of
any tax programs. And it will make Alaska a
friendlier place to do business than if we
instituted a complex maze for a sales tax.
Consider for a moment a business selling its
goods nationwide. First of all, it is confronted
with 7,500 different taxing jurisdictions -
states, cities, and counties, and special
jurisdictions such as transit districts, school
districts, or my favorite, the Brewers Stadium
District in Wisconsin. Many of these
jurisdictions overlap. Each might have a
different sales tax, rules, and different rates.
Suppose the state taxes clothing, but the county
exempts clothing but not athletic gear, but the
transit district taxes clothing but considers a
softball mitt to be clothing. The business would
have to figure out which transit district and
which county the address was in, and then decide
whether the purchase was taxable for each one
and, if so, what was the tax rate.
If our example were in Mississippi, there could
be seven different tax rates depending on what
was sold, ranging from an 8 percent tax on drink
for human consumption through vending machines to
a 1 percent tax on services performed by an
electrical power association. After withholding
the tax, that same business might be subject to
three different audits, including the one that
said, "Oh, our rates changed two weeks ago. What
do you mean you didn't know?"
And suppose the consumer bought an item and sent
the check to a business' corporate headquarters
in Missouri, which then notified its distributor
in Oregon, who found that the closest warehouse
with the product was in North Carolina, who
called up a shipping firm in South Carolina to
deliver it back to the purchaser in Virginia. In
what state did the sale occur? Each state may
have its own sourcing rules and each state could
say, "That sale occurred in our state."
Now consider the phone call itself that was used
to place the order. I will not flesh out the
full example, but if you think about it, it
should come as no surprise that AT&T is one of
the biggest backers of the Streamlined Sales Tax
Project. AT&T nationwide files about 70,000
different sales tax returns a year.
Back in 1967, the U.S. Supreme Court looked at
all this and issued its famous (or for some of us
infamous) Bellas Hess ruling. Illinois had a
sales and use tax and asked that Bellas Hess, a
firm in Missouri that sold goods by mail to
purchasers in Illinois, be required to collect
sales tax and remit it to Missouri. The Supreme
Court said it would be an intolerable burden on
interstate commerce to require an out-of-state
business to do all the work necessary to
accurately collect the tax. As such, no state
could ask that of businesses outside its legal
jurisdiction.
Number 1026
Before we roll our eyes too much, let's look at
what a retailer looking at Alaska sees. For
example, the Kenai Peninsula Borough has a 2
percent tax and, within the borough, the City of
Homer has a 3 percent tax, but the City of
Kachemak has none. Another example, the City of
Ketchikan and Ketchikan Gateway Borough have
separate sales taxes. Newspapers and
publications are taxable in the city, but not
under the borough tax. Residential rentals are
taxable by the borough taxes, but not the city.
Many attempts to remedy this mess fell short over
the 35 years since the court case, while the
amount of interstate commerce has grown and
grown. Finally, as Internet sales hit, the
Streamlined Sales Tax Project looks like it might
have created a good answer. What is the answer?
It is a short statute that each participating
state must adopt - the Uniform Sales and Use Tax
Administration. The legislative body for that
act says: "This state should enter into an
agreement with one or more states to simplify and
modernize sales and use tax administration in
order to substantially reduce the burden of tax
compliance for all sellers and for all types of
commerce."
The agreement between the states sets forth the
framework that a state tax must conform to:
Uniform Definitions - Any state that, for
example, that ... exempts groceries, but taxes
restaurant food will have to treat a ham and
cheese croissant from the Safeway deli the same
way as a croissant sandwich in a restaurant.
Rate simplification - Each state may have just
one tax rate covering all categories, except a
specialty allowance for food and drugs which may
have a lower rate. Each city can have its own
rate, or other jurisdiction added to the state
tax rate.
It requires state administration. The state is
responsible to track local changes and provide a
central point of administration. There are also
uniform sourcing rules, audit rules, and
administration of exempt transactions.
Thirty-eight states have brought the project
together. It is their hope to ask Congress for a
law allowing that if a state is a participating
member of this project, then every business would
be required to collect tax on items sold into
that state. Under the Streamlined Sales Tax
Project, such collection would not be
unreasonable because it would no longer be an
unreasonable burden on interstate commerce.
Number 1257
Before closing, let me mention a couple of things
the Streamlined Sales Tax Project does not do.
It does not set the tax rate in any state or
city; that is up to you and the municipal
assemblies. It does not set out what you can
decide to exempt or not exempt; it just requires
that if you exempt something for which the
Streamlined Sales Tax Project has a definition,
that you use the definition. The project creates
a framework in which legislatures can make the
critical policy decisions.
As you think about a sales tax, please think
about the Streamlined Sales Tax Project. We
would be the first state to adopt a sales tax
since it came into being, and we have the chance
to learn from other states' mistakes.
Thank you, and I'll try to answer any questions
you may have, though I usually do better
answering questions on taxes we have in place
rather than taxes we don't.
Number 1405
MR. PERSILY pointed out that the members have the executive
summary of the Streamlined Sales Tax Project in their
packets.
CO-CHAIR HAWKER asked Mr. Dickinson to reiterate what the
Streamlined Sales Tax Project does and what it does not do.
Number 1540
MR. DICKINSON explained that it is not a prototype sales
tax act, and merely passing the model legislation would not
be the final step. This project addresses many of the
troubling areas of sales taxes, especially the areas that
are troublesome because each state has different rules
instead of a uniform set of rules. In areas where
uniformity is not required, it allows the local
jurisdiction, states, or localities to make the critical
decisions that are important to them. He told the members
that, for example, it's not that AT&T wants to avoid taxes,
it is simply more expensive in some cases for them to do
the billing for a phone call, than to route the phone call.
When the company has to figure out each jurisdiction, has
to keep up to date on all 7,500 possible changes including
ones that they were not aware of before, it becomes
extremely difficult. Mr. Dickinson said that it almost
seems trivial, but if the difference between a transit and
school district does not line up with a zip code, it is
hard for the company to send out a bill because they are
unsure if the addressee is in the right set of
jurisdictions. The natural reaction is that business will
say that if they do not have a presence in the state, they
will not establish one. There are many businesses that
sell in Alaska that do not have a presence here, he
commented. Under the current rules, these companies do not
have to collect sales taxes.
MR. DICKINSON explained that this project would create a
structure that enables businesses to collect taxes and
remit it to [the State of Alaska] without an intolerable
burden.
Number 1830
REPRESENTATIVE WEYHRAUCH posed the hypothetical question
that if the legislature were to adopt the Streamlined Sales
Tax Project, would it require Alaska to enter into an
interstate compact with one or more states before or
concurrent with the law [being enacted]. How does that
work, he asked.
MR. DICKINSON responded that if this project became law,
then Alaska would become a participating state with certain
rights and obligations. No state has ever passed the act
without having a sales tax in place, so there may be some
curious aspects with respect to that. The main obligation
would be that when passing the sales tax act itself, it
must meet the requirements of the uniform standards. Mr.
Dickinson offered the example of our current income tax
under Title 43.19 and Title 43.20 for corporate income
taxes. Title 43.19 covers the multi-state act which sets
out broad principles while Title 43.20 covers the specific
implementation of those principles for Alaska.
Number 2039
REPRESENTATIVE WEYHRAUCH pointed out that some communities
already have sales taxes. If Alaska were to adopt a sales
tax or enter into this uniform sales and use tax
administration act with other states, what would happen to
a local communities' ability to implement a sales tax and
garner the benefit of its own local sales tax, he asked.
MR. PERSILY replied that HB 293 rewrites that section of
Title 29 which deals with municipal powers. It simply says
that the legislature or state determines the exemptions,
enforcement, collection, and administration of the sales
tax. He explained that the municipality would simply say
to the state that it wants a 2 percent, 3 percent, or 4
percent sales tax and that would be collected from
businesses in its jurisdiction. The state would collect
the taxes and send them back to the municipality.
Number 2227
REPRESENTATIVE WEYHRAUCH surmised that [the state assumes
authority in collecting the tax] then delegates it back to
the municipalities through a check.
MR. PERSILY responded that the municipalities would get the
money, and could in essence, shutdown the local sales tax
offices. In Juneau's case there are 38 sales tax
exemptions, those would go away and the state sales tax
exemptions would be in effect, he explained.
REPRESENTATIVE WEYHRAUCH posed a situation which this law
is in place. He asked if the local sales tax would go away
and the city would simply [tell the state] it wants a 5
percent sales tax on sales from the community or would the
state say this is what has been calculated for the [local]
sales tax and the state would send the city a check.
Number 2359
MR. PERSILY clarified that if this law went effect the
municipalities would tell the state what [percent sales
tax] rate, which is set by municipal ordinance, it wants
collected. The state would collect the sales tax and send
the municipality a check.
REPRESENTATIVE WEYHRAUCH referred to the "Comparison of
State and Local Retail Sales Tax" chart that was
distributed to the members, where there is a maximum of 7
percent that can be levied by communities under Title 29.
He asked if that assumption is correct.
MR. PERSILY replied that the highest sales tax in the state
is 7 percent right now. He told the members that he is not
aware of a limit on sales taxes under Title 29; however,
cities who currently have a 5 percent, 6 percent, and 7
percent [sales tax], will be worried that if the state adds
on another 3 percent sales tax, it will hurt the local
economy. The legislature could setup something in statute
that may include a grandfather clause specifying that a
combined state/local rate may not exceed 8 percent, for
example.
REPRESENTATIVE WEYHRAUCH said that he believes that under
this scheme, the local tax would be supplanted by the
statewide policy and the city would have the incentive to
say it wants the 7 percent sales tax, even if the community
does not have a sales tax in place now.
Number 2530
MR. DICKINSON highlighted that in Anchorage there is no
sales tax and if the city did not introduce one, everyone
there would be paying a 3 percent sales tax on goods and
services. If Anchorage were to add the 7 percent, then
everyone would be paying 10 percent. The aforementioned
decision remains with the local government. Before a
community could get 7 percent refunded, it would have to
add the 7 percent [sales tax] on all goods and services
sold in the community.
MR. PERSILY stated that there is nothing in statute or this
legislation that sets a maximum rate for the combined
state/municipal tax rate.
Number 2634
REPRESENTATIVE WEYHRAUCH asked if Mr. Persily believes this
bill could become a sales tax exemption bill rather than a
sales tax bill.
MR. PERSILY responded that it will be incumbent on public
officials to hold the line against lobbyists who will want
to turn it into an exemption bill. This could become
something like Juneau's sales tax with 38 exemptions, which
requires a much higher rate to obtain the same amount of
revenue, he said.
CO-CHAIR HAWKER commented that whatever is accomplished
[with this bill] must accommodate local tax structures. He
pointed out that communities with property taxes are
relevant. It is important to note the aggregate self-
assessed, self-reliance that communities are taking on. A
fair benchmark of looking at that is the per capita revenue
generated from whatever sources are within the communities.
As Representative Weyhrauch pointed out, the sales tax
project offers an extreme benefit across the state. If
there is uniformity and consistency, it will make it
possible for statewide businesses to work among
jurisdictions. Co-Chair Hawker commented that it will be
important to work with communities and the Alaska Municipal
League. He said he believes this is a vital dialogue. As
divergent as interests are in these communities the per
capita burden, on Fairbanks and Anchorage is less than $2
per capita difference. The local tax burden in the City of
Wrangell which is often cited as a community with a high
tax burden is less than $60 per capita higher than
Anchorage and Fairbanks. The Streamlined Sales Tax system
offers efficiency, consistency, and facilitates business in
the state. He said he agrees with Representative Weyhrauch
that the great fear is that this bill does not become one
that panders to special interests.
CO-CHAIR WHITAKER noted for the record that Representatives
Gruenberg, Wolf, and Crawford have joined the meeting.
Number 3055
REPRESENTATIVE SAMUELS asked if all the exemptions would be
accepted statewide, or do the exemptions just have to meet
the statewide definitions.
MR. PERSILY replied that state statute would set the
exemptions and the municipal exemptions would go away
because the [municipalities] would lose that authority.
Number 3157
CO-CHAIR HAWKER told the members that the Streamlined Sales
Tax Project has detailed position papers on many subjects.
The issue that Representative Samuels' just raised is
discussed under a series of position papers on subject. He
told the members that copies of those papers would be
distributed to the members.
Number 3241
REPRESENTATIVE OGG asked how the state's cost of
administration would differ from the [current] local cost
of administration.
MR. PERSILY responded that the bill and fiscal note before
the committee assumes that the state will fund the total
cost of enforcing, administering, and collecting the sales
tax. The local municipalities, cities, and boroughs could
shutdown their sales tax collection efforts. He noted that
it will become a policy call for the legislature as to
whether the state pays the total cost and sends the check
to the communities, or the state charges municipalities for
the services that are provided. He reiterated that in the
current fiscal note there is the assumption that the state
pays the total cost in Alaska and just sends the checks to
the cities.
Number 3400
REPRESENTATIVE OGG summarized that if Kodiak had a 6
percent sales tax, there would be no administrative costs;
the city would just receive a check for the sales tax.
MR. PERSILY responded that as the bill is currently
written, that is a correct assumption. The communities
would see the revenue, and save the administrative costs.
Number 3422
MR. DICKINSON advised the members that at one Streamlined
Sales Tax Project meeting that he attended that issue was
hotly debated. He explained that what might be an option,
for example, is that the City of Kodiak may want to employ
a part-time person to review the state's records on
distribution. It is a policy question, he said. The
legislature may say the state will do everything necessary
and then the municipality may chose to have some degree of
interaction to ensure that the municipalities are
comfortable and that it makes sense. There is an "analogy"
[currently in place] with statewide property taxes that are
assessed, and the localities are very interested in what
happens in that process.
REPRESENTATIVE OGG pointed out that existing sales taxes in
some communities are high, some are low, and some have a
cap. He asked if there has been any analysis on the kind
of impact a statewide sales tax would have on communities
that have used local sales taxes as a way of offsetting
property taxes.
Number 3702
MR. PERSILY responded that one of the policy calls the
legislature will have to make in dealing with this
legislation is whether to set a cap and whether it applies
to only certain goods. The analysis of this policy was
discussed at great length in fiscal policy meetings over
the last couple of years. He explained that the discussion
centered on the fact that there is a threshold of pain, at
which point the tax rate is so high that it does begin to
affect consumers' purchases. In other words, he said, at
what point will [consumers] say they will not pay the sales
tax, and buy an item somewhere else. Mr. Persily stated
that he is not aware of any scientific study or conclusion
[on this issue] other than the recognition that there
probably is a point at which consumer habits will be
impacted.
MR. DICKINSON told the members that with the Streamlined
Sales Tax Act there would be a phase out of caps and
thresholds by December 31, 2005. However, it is important
to note that certain sales would be exempted. Those
exemptions are motor vehicles, aircraft, watercraft,
modular homes, manufactured homes, and mobile homes. Homes
are exempted because they are real property, and motor
vehicles are not covered because there is a specific
exemption under the uniform sales tax.
MR. DICKINSON, in response to Representative Ogg, clarified
that under the Streamlined Sales Tax Act there could only
be caps on motor vehicles, aircraft, watercraft, modular
homes, manufactured homes, and mobile homes. For example,
Tennessee has a cap on an aircraft over $100,000. He
explained that the state could continue to make exceptions
and pass caps on how much an Alaskan would have to pay when
purchasing a car or a boat, although the state would not be
exempting it from the sales tax.
Number 4007
REPRESENTATIVE WILSON inquired as to how the state would
take over the collection of sales tax. Would the state
contract with someone locally or send [a state employee]
into each community, she asked.
MR. PERSILY explained that the state would set up a central
sales tax office so that there would be one place to send
the checks. He added that there would possibly be
satellite offices in larger communities. However, he
mentioned that some communities may want to keep someone on
staff to monitor state collections and enforcement.
Number 4125
REPRESENTATIVE WILSON commented that the person doing that
work in local communities would lose his/her job.
MR. PERSILY acknowledged that the cities have the option of
eliminating that position or reassigning it to other
duties. However, communities may want to keep staff on to
monitor the collection of sales taxes.
MR. DICKINSON pointed out that this bill does not affect
special excise taxes. For example, the local raw fish
taxes and bed taxes will still be a local option and may
still require administrators. This bill only refers to a
broad-based sales tax, he said.
REPRESENTATIVE GRUENBERG asked how the bill addresses
Internet sales.
Number 4344
MR. DICKINSON replied that [Internet sales] are the focus
of the Streamlined Sales Tax Act and the same rules apply.
For example, if Amazon.com does not have a substantial
presence in the state, and it sends books or records to
Alaska, it has no obligation to collect a sales tax for the
localities or a statewide sales tax. Once this Streamlined
Sales Tax [Act] is in place, the notion is that either
through a federal court decision or federal legislation,
[Internet companies] would be required to start collecting
taxes. He added that Amazon.com is fine with the processes
of collecting taxes; they just do not want to be in a
position of not knowing what is necessary.
CO-CHAIR HAWKER asked Mr. Dickinson to explain Section 5 of
the Uniform Sales and Use Tax Administration Act, which
authorizes the state to enter into a streamlined sales and
use tax with other states.
MR. DICKINSON read the following quote from Section 5 of
the [Uniform Sales and Use Tax Administration Act]:
No provision of the agreement authorized by this
act, in whole or in part, invalidates or amends
any provision of the law of this state. Adoption
of the agreement by the state does not amend or
modify any law of this state, implementation of
any condition of the agreement in this state,
whether adopted before or after the membership of
this agreement must be an action of this state.
MR. DICKINSON said that all this act does is set out the
broad framework that says the state is going to enter into
agreement with one or any number of other states. He added
that the notion right now is that agreement would be with
38 other states. He told the members the agreement is set
out so that the goal would be to bring the state in line
with the principles enunciated here. Mr. Dickinson
summarized that the uniform act sets the goal. He asked
the members to look at another sentence in Section 7 of the
uniform act, which says:
This agreement authorized by this act is an
accord among individual cooperating sovereigns in
furtherance of their governmental functions.
MR. DICKINSON summarized that this is not some agency
coming in and telling [Alaska] what to do; it is basically
saying that if Alaska does this the same way other states
are doing it, there will be a mutual benefit.
Number 4646
REPRESENTATIVE HEINZE said that she is confused regarding
what items are taxable.
TAPE 03-20, SIDE B
MR. PERSILY specified that real property is not taxable.
Number 4631
MR. DICKINSON said property is either real or personal
property. For example, the valuation of the Trans-Alaska
Pipeline System is considered personal property. Mr.
Dickinson said it is important to recognize that this is
not just a sales tax, but also a sales and use tax. To
ensure that the state is not swamped with importation from
states with a lower sales tax, the use tax becomes very
important. He used the example of someone buying a sofa in
Seattle and shipping it to Alaska. That person may not
fill out paperwork, but just go ahead and pay the sales tax
in Washington. The individual could use the tax paid in
Washington as a credit toward the sales tax in Alaska, and
then he/she would not have to pay anything. Mr. Dickinson
explained that it will be up to the legislature to
determine how the state will deal with industrial
purchases. In some states, the purchase of any business-
related materials are exempt. Other states only exempt
items that are purchased for resale. He posed an example
of a business building chairs. On one extreme the wood and
varnish are tax exempt while the tools are not. In the
other extreme, where there is a blanket exemption for
business, the tools would be exempt. Mr. Dickinson
identified that as one of the decisions the members will
have to make. In HB 293 there is a fairly narrow
restriction on exemptions. That issue varies greatly
between states, he said.
Number 4336
REPRESENTATIVE HEINZE said that she noticed the bill
analysis specifies that certain exemptions include
ingredients and components of manufacturing. If a module
built in Kenai is on its way to Prudhoe Bay, would the
components be tax exempt while the completed module would
be taxed.
MR. DICKINSON explained that if a firm in Kenai were to
purchase all the pieces, use them to create a module, and
then sell it to a producer on the North Slope, the company
that purchased the pieces would not be taxed. However,
when the module is sold, it [the sale of the module] would
be taxed. If the entire process were owned by the
producer, in other words, a Kenai firm was fabricating it,
then as those [imported pieces] were brought in they would
be taxed.
CO-CHAIR WHITAKER clarified that the item would be taxed
only once.
MR. DICKINSON agreed and pointed out that is why there is a
use tax credit for tax already paid in other states.
Number 4127
REPRESENTATIVE WILSON asked how this tax would work for a
restaurant. For example, when lettuce is purchased for a
salad, no tax is paid; however, when the salad is sold a
tax is charged.
MR. DICKINSON commented that if the legislature chooses to
exempt all business inputs, then when the restaurateur buys
lettuce he/she would not pay tax, although there would be a
tax on the meal. He explained that a system is set up so
that when the restaurateur goes to the store, the
restaurateur simply presents the tax exempt certificate.
The problem with this is that in a recent court case, for
example, where a funeral parlor purchased a 50-gallon tank
of weed killer the court ruled that was not a reasonable
use and that the business honoring the exemption
certificate should have asked more questions. Mr.
Dickinson said one of the reasons this bill is so long is
that it gets into the businesses' obligations to each other
when resale or exemption certificates are presented. He
emphasized that the goal is to only tax items once. He
explained that there is also a direct pay certificate. For
example, in a restaurant only the things that were resold
[were taxable] not the items that contributed to that
resale. With a direct pay certificate, a restaurant would
figure out on a monthly basis what was taxable and what was
not and pay the state monthly. This method may be easier
for the business than determining what is taxable and what
is not each time there is a purchase.
Number 3804
CO-CHAIR WHITAKER asked Mr. Persily to go over page 4 and 5
of the fiscal note where the department recommends adding
provisions to the legislation.
MR. PERSILY told the members that the first two items the
department recommends adding to the legislation has to do
with the streamlined sales tax. He said that he believes
there should be something in the legislation that directs
the department to write regulations that are consistent
with a streamlined sales tax, particularly a section
detailing sourcing of services. The third item deals with
bartering. The department is not proposing exempting or
taxing bartering; however, the legislature should address
the issue. He pointed out that the taxing of bartering
would be very difficult to enforce. The fourth item would
allow the department to issue direct pay permits.
MR. PERSILY said the next several items deal with
consolidating liability. He explained the Department of
Revenue hired an individual several years ago on a short-
term contract to research a draft sales tax bill. It was
done because the department believed at some time in the
future a sales tax would be considered. As a result of
that research the 25 suggestions brought issues to light.
Mr. Persily told the committee that some of these items are
housekeeping, and some are significant. He pointed out
that the draft bill presented to the House Special
Committee on Ways and Means is a work in progress and still
needs technical changes to it. For example, item six needs
the first sentence deleted and the word "however" added to
the second sentence. Item seven would clarify that this is
a sales and use tax. This change would ensure that each
reference refers to both. Mr. Persily explained that item
nine deals with the connection needed to have taxing
jurisdiction over an entity. Under existing law [there is
a requirement for] a physical presence in the state, which
is why Amazon.com, for example, sales into Alaska cannot be
required to collect sales tax because there is no nexus.
Mr. Persily said that the department wants this legislation
to say that the state can collect sales taxes to the full
extent that is allowed by the U.S. Constitution.
MR. DICKINSON added that this is something the department
hopes will be changed in the near term. The notion is to
make it a very broad [statement].
Number 3331
MR. PERSILY explained that item 11 deals with certificates.
For example, in Juneau when a building permit is obtained,
all purchases are exempt from sales tax. Each building
permit holder is issued a card so when there are purchases
made for the project, the items are logged in as tax
exempt. This section allows for two kinds of certificates,
one of which is a blanket certificate or specific
transaction certificate.
MR. PERSILY told the members that item 13 deals with
Section 43.40.090 which exempts government purchases from
sales taxes. [That exemption includes] city, municipal,
state, school districts, and Indian tribes. This change
would amend the section to read "a federally recognized"
Indian tribe.
MR. PERSILY summarized his comments by saying that the
remaining items deal with adopting the streamlined sales
tax definitions. He said he is not aware of any other
changes that are significant, and asked Mr. Dickinson if he
would like to add anything to what he has said.
MR. DICKINSON agreed that the rest of the changes are not
significant policy calls for the committee.
Number 3100
CO-CHAIR HAWKER asked Mr. Persily if the department
believes the legislature should consider a separate
[higher] rate structure on sales of contraband and the
performance of illegal services.
MR. PERSILY replied that he is not sure there is a good way
to answer that question.
MR. DICKINSON observed that if the state does adopt the
streamlined sales tax, only one general rate is allowed,
although the states do allow a different rate for drugs.
CO-CHAIR HAWKER commented that addressing that issue may
have to be handled by a separate excise tax.
MR. DICKINSON agreed that is possible. He added that if
the state wanted to put on a separate excise tax for
marijuana that would be permissible.
Number 2929
REPRESENTATIVE WILSON asked Mr. Dickinson about a question
of fairness. Because of Alaska's great vastness, products
must travel great distances to reach consumers. For
example, the cost of a gallon of milk in Wrangell costs
$3.99 so if there were a 3 percent sales tax the residents
would be paying 12 cents; however, the cost in Nome is
$5.69 so the residents there would be pay 17 cents, in
Kotzebue the cost is $8 a gallon so they would be paying 24
cents for the same gallon of milk, and in Anchorage that
same gallon of milk is only $3.49 so they would only pay 10
cents on that gallon of milk. She asked how fairness would
be addressed in this case.
MR. DICKINSON replied that a fair way of handling this kind
of purchase would be to handle purchases by unit and not by
the price. He explained that fairness [can be achieved] by
treating everyone the same based on how much they spend, or
by going to a per unit basis. However, with a broad tax it
is hard to go to a per unit basis. Mr. Dickinson explained
that some states that tax food go to a credit that allows a
payment back to low-income families who pay a
disproportionately large portion of their income on taxes
because they spend a disproportionately large portion on
food. There are a number ways of dealing with this issue.
Mr. Dickinson told the members the most common way is to
keep these purchases outside the sales tax system, but make
it a remission to the targeted group so they receive back
some of what they have paid in.
Number 2614
REPRESENTATIVE WILSON commented that it will be very
difficult because of the cost of transportation [that is
added to the purchase price.
MR. PERSILY addressed Representative Wilson's concern by
saying that if the legislature wants to adopt a sales tax
as a part of an overall fiscal plan, it is not easy to
overcome the fact that there is a certain amount of
unfairness. If a person pays more for a certain product,
that person will pay more tax, he said.
REPRESENTATIVE WILSON suggested providing a payback to
those areas might be a good idea.
Number 2452
REPRESENTATIVE HEINZE noted that the bill does not allow
for the sale of natural gas to be exempt. She asked if Mr.
Persily believes this will produce a large impact on rural
Alaska.
MR. PERSILY replied that utilities are not tax exempt. He
said he believes that the component in the manufacturing
process would be tax exempt.
Number 2309
CO-CHAIR HAWKER told the members that he concurs with Mr.
Dickinson's response on fairness and equalization across
the state. If the measure is truly to be the same dollar
collected across the state no matter where residents
reside, it is important to look at a system of unitizing
assessment structure. He said he believes this will be the
more daunting challenge in this process.
MR. PERSILY clarified his response by saying that the gas
purchased to turn into fertilizer would not be taxed. In
response to Representative Heinze's question about sales
tax on natural gas for Chugach Electric, he explained that
the gas the company purchases would not be taxed, but when
electricity is sold to a customer, the customer would pay
[tax] on the electricity that is generated from that gas.
Number 2138
REPRESENTATIVE OGG commented on Representative Wilson's
idea and suggested that while it may be impossible to
credit individuals, perhaps it would be possible to
compensate communities on a CPI [Consumer Price Index] or
something similar to that.
Number 2038
MR. PERSILY pointed out that the department also provided a
document titled "Comparison of State and Local Retail Sales
Taxes", which is a summary of other statewide sales taxes.
He explained that this handout was provided to provide the
members an idea of what other states charge; what other
cities and boroughs of Alaska charge; how much the
department believes would be raised; and who would pay a
tax. For example, the department estimates that
approximately 10 percent of the year-round sales tax would
be paid by out-of-state visitors and temporary workers.
Another item which is titled "Building Blocks" raises some
of the policy and technical issues that need to be
considered as the committee crafts a sales tax bill.
Number 1921
CO-CHAIR WHITAKER asked the members to give this necessary
component to a fiscal plan a great deal of thought.
REPRESENTATIVE KOHRING told the committee he has a concern
about the sponsor statement. He asked that the statement
reflect that this bill was produced at the suggestion of
the co-chairs and not the whole committee.
CO-CHAIR WHITAKER responded that the committee will be
happy to comply with his request.
Number 1637
REPRESENTATIVE WILSON commented that even if there is a
mechanism to payback communities [that pay an inequitable
amount of sales tax] the individual citizens in that
community will not be reimbursed. For example, Wrangell,
which has the highest sales tax in the state, will be
paying 10 percent if the state implements a 3 percent sales
tax. Representative Wilson cautioned that the committee
must work to make this fair because if it cannot be worked
out, she said she would not be able to support the
legislation.
[HB 293 was held over.]
ADJOURNMENT
There being no further business before the committee, the
House Special Committee on Ways and Means meeting was
adjourned at 8:28 a.m.
| Document Name | Date/Time | Subjects |
|---|