Legislature(2003 - 2004)
05/11/2003 05:00 PM House W&M
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* 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 11, 2003
5:09 p.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Jim Whitaker, Co-Chair
Representative Cheryll Heinze
Representative Vic Kohring
Representative Norman Rokeberg
Representative Bruce Weyhrauch
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Dan Ogg
Representative Les Gara
Representative Sharon Cissna
Representative Paul Seaton
Representative Ralph Samuels
Representative John Harris
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
05/01/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
05/01/03 (H) Heard & Held --
Teleconference --
MINUTE(W&M)
05/06/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
05/06/03 (H) Heard & Held
MINUTE(W&M)
05/07/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
05/07/03 (H) Heard & Held -- Recessed to a
call of the chair --
MINUTE(W&M)
05/08/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
05/08/03 (H) Heard & Held -- Recessed to a
call of the Chair --
MINUTE(W&M)
05/09/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
05/09/03 (H) Heard & Held
MINUTE(W&M)
05/10/03 (H) W&M AT 8:30 AM HOUSE FINANCE
519
05/10/03 (H) Heard & Held
MINUTE(W&M)
05/11/03 (H) W&M AT 5:00 PM HOUSE FINANCE
519
WITNESS REGISTER
LARRY PERSILY, Deputy Commissioner
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions about the proposed
committee substitute (CS) for HB 293, Version Q.
ACTION NARRATIVE
TAPE 03-29, SIDE A
Number 0001
CO-CHAIR JIM WHITAKER called the House Special Committee on Ways
and Means meeting to order at 5:09 p.m. Representatives Hawker,
Whitaker, Heinze, Kohring, Weyhrauch, Wilson, Gruenberg, and
Moses were present at the call to order. Representative
Rokeberg arrived as the meeting was in progress.
Representatives Ogg, Gara, Cissna, Seaton, Samuels, and Harris
also attended.
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."
REPRESENTATIVE HEINZE turned to the Streamlined Sales Tax
project and asked if it was in place today, would the state
receive taxes on interstate commerce.
Number 0144
LARRY PERSILY, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, said that if there was a state sales tax
and a business such as Barnes and Noble, which has a store in
Anchorage, there would be a nexus in the state. Therefore, if
someone in Alaska were to order from Barnes and Noble via the
Internet, he believes there would be a nexus and the state could
collect sales tax on those businesses with a connection in
Alaska. He related his belief that the aforementioned would
open the door for additional sales tax collection by the state
as well as municipalities.
Number 0311
CO-CHAIR HAWKER moved to adopt the proposed committee substitute
(CS) for HB 293, Version 23-LS1064\Q, Kurtz, 5/11/03, as the
working document. There being no objections, Version Q was
before the committee.
MR. PERSILY explained that Version Q is a flat 3 percent sales
tax as specified on page 8, line 29.
CO-CHAIR HAWKER recalled that the intent was to remove all
vestiges of seasonality.
MR. PERSILY agreed and noted that there are no seasonal changes
encompassed in Version Q. He directed attention to page 3,
lines 11-16, and pointed out that under Version Q the phase-in
would end December 31, 2009. Therefore, for the first four
years, municipalities will receive all of their sales tax
collections within the 8 percent cap, even if the state comes up
short. After December 31, 2007, the municipal levy may not
exceed 6 percent and after December 31, 2009, the municipal levy
may not exceed 5 percent, and thus 3 percent would be left for
the state.
Number 0712
REPRESENTATIVE WEYHRAUCH asked if the city sales tax would
remain at status quo until completion of the phase-in.
MR. PERSILY confirmed Representative Weyhrauch's understanding
and pointed out that on page 3, lines 11-16, the phase-in of the
rate occurs, another section addresses the phase-in of the
enforcement and collection powers.
CO-CHAIR HAWKER highlighted that there are three components of
the phase-in, one of which is the phase-in of overall
administration and point of collection. The second portion is
the phase-in of the rate integration and the third point is the
conformance of the tax base for which a separate phase-in is
proposed.
Number 0833
REPRESENTATIVE GRUENBERG surmised that in Anchorage, those
municipalities that [do have high local taxes] would lose some
revenue.
MR. PERSILY agreed that would eventually be the case. For
instance, a city with a 6 percent sales tax could collect 6
percent until December 31, 2009, at which point the city would
have to [lower its tax] to 5 percent. He related his
understanding that the intent of the legislation, through the
phase-in is that such municipalities would have seven to eight
years to deal with the fact that the local tax rate would drop.
MR. PERSILY pointed out that the part of the phase-in dealing
with rates is located on page 3; the portion of the phase-in
dealing with administration and collection is located on the
bottom of page 25. Mr. Persily explained that the phase-in
beginning at the bottom of page 25 means that basically the
municipalities can collect their own money under their own rules
for two years. For the next two years, the municipalities
continue to collect the money, but they do so under the state
rules. After four years, the state would take over collection
under its rules.
Number 1125
REPRESENTATIVE GRUENBERG directed attention to Section 2(b)
which begins on page 25, line 31 through page 26, line 2. The
language used in this subsection refers to a general sales and
use tax. However, he posed a situation in which the
municipality doesn't technically meet that requirement such as a
bed tax. He inquired as to the rules for that municipality.
MR. PERSILY clarified that this doesn't apply to special
municipal taxes such as the fuel transfer tax, the bed tax, the
car rental tax, the liquor tax, and the raw fish transfer tax.
The aforementioned taxes are outside the 8 percent cap and don't
come under state control at any point. In further response to
Representative Gruenberg, Mr. Persily said his understanding is
that the aforementioned is clear as it is currently drafted.
REPRESENTATIVE GRUENBERG expressed the need for every
municipality to be able to understand this so that there is no
question.
CO-CHAIR HAWKER pointed out that on page 4, lines 5-8, the
language specifies that "a muncipality may levy specific excise
taxes on single categories of tangible personal property or
services, such as bed taxes and fish taxes.
Number 1349
MR. PERSILY, in response to Representative Gruenberg, responded
that the term excise tax is broad enough to cover all of the
taxes specified earlier because the language is clear that the
tax proposed only applies to a general sales and use [tax] of
which taxes such as the bed tax are not. Mr. Persily turned to
Representative Heinze's earlier question regarding how much
money the state will receive, and suggested that the committee
keep in mind that this legislation still includes the 12 cents
per gallon increase in motor fuel taxes, which amounts to about
$41 million in a full fiscal year. He pointed out that Version
Q includes a significant exemption for medical services and
prescription drugs. However, Version Q is fairly tight with
regard to the manufacturing and transportation exemptions.
Therefore, the sales tax component alone would probably generate
$300-$375 million, depending on what is ultimately decided with
manufacturing.
REPRESENTATIVE HEINZE clarified that her question was in regard
to the phase-in period when the state wouldn't receive its full
3 percent.
MR. PERSILY said that he would estimate that it would be less
than 10 percent of the state's collection [that would be lost].
He said that needed to be run now that the legislation is using
a year round tax that doesn't fluctuate.
Number 1645
MR. PERSILY, upon the request of Co-Chair Whitaker, explained
the phase-in again. With regard to the rate, the municipalities
keep 100 percent of their rate for the first four years and
whatever is left [beyond the municipal tax up to the 8 percent
cap] is sent to the state. Therefore, if there isn't anything
left or [less than 3 percent is left] under the 8 percent cap,
the state would come up short. On December 31, 2007,
municipalities can only take 6 percent, and two years later that
would be reduced to 5 percent of the 8 percent cap and thus the
state would begin to collect its full 3 percent in all
municipalities. At that point the phase-in would be complete
and some municipalities will have to reduce their rate to 5
percent. He then turned to pages 25-26, which refers to the
phase-in of control over collections, auditing, and enforcement.
Under this provision, municipalities would collect all their own
money under their own rules for two years. During the next two
years, the municipalities would continue to collect sales tax
under the state's rules.
MR. PERSILY, in response to Co-Chair Whitaker, explained that
during the first two years the state would set up a sales tax
office within the Tax Division to collect state sales tax
statewide. However, all the communities with a sales tax would
continue to use their own rules and personnel during the first
two years.
Number 1852
CO-CHAIR WHITAKER surmised then that the municipalities or their
lobbying group could come to the legislature and identify
specific problems and concerns. There would be two years in
which to consider a downside and remedy it.
MR. PERSILY said that the truth is that there are municipalities
in the state that have collected sales tax for decades and know
how to do it. Therefore, it's very likely that during the two-
year transition, the department will learn a lot from the
municipalities as the phase-in to state rules occurs.
CO-CHAIR HAWKER emphasized that there doesn't have to be a
change for any municipality in any way during the first two
years. For the subsequent two years, while working on a
consistent base, there is the opportunity to create convergence
on administrative matters. Co-Chair Hawker said that it's
presumed that there will be a working process between
communities and the state during the entire process.
MR. PERSILY pointed out that during that two-year period there
may be issues that the Department of Revenue can address by
regulation and there may be some that require changes to
statutory references, which would mean coming back to the
legislature. Hopefully, this wouldn't become an annual event.
Number 2141
REPRESENTATIVE OGG related his understanding that this system
will take effect July 1, 2003, and the sales tax would be
implemented January 1, 2004. Between those two dates, he
surmised that the state would establish a mechanism for
collecting the 3 percent tax, separate from the municipal
[revenue]. He also surmised that businesses will receive a form
from the state and those businesses in the cities with municipal
taxes will continue to [fill out the municipal forms].
Representative Ogg indicated the need to include a statement
specifying that the state may utilize the municipality as a
contractor at the end of 2007 because that may be more
efficient.
MR. PERSILY said that such language isn't included, although the
matter has been discussed. Mr. Persily noted the [department's]
interest in having that as an option.
CO-CHAIR HAWKER asked if [contracting with the municipality at
the end of 2007] would be a matter subject to regulation rather
than statute.
MR. PERSILY answered that he doesn't believe statutory authority
is necessary to do that. Clearly, the direction has been to
explore that possibility and, during the phase-in, work with the
communities to make the taxes efficient, fair, and easy on the
communities and the businesses in those communities. Perhaps
the best way to include this notion in legislation would be
through a statement of intent.
Number 2431
REPRESENTATIVE OGG said that municipalities and boroughs in his
area wanted this as an option that the state may pursue, which
is why he suggested the permissive language specifying that "the
state may utilize the municipalities as their contracting
agent." Therefore, the state wouldn't be forced to contract
with the municipality, although it encourages municipalities to
approach the state. If it was left to regulation, the
legislature's policy wouldn't be there for regulation.
MR. PERSILY emphasized that whatever is done to [encourage]
contracting with the municipality would ensure that it doesn't
violate the Streamlined Sales Tax Agreement, which is the
ultimate goal of this. In response to Co-Chair Whitaker, Mr.
Persily confirmed that nothing in the current language prohibits
the regulations being developed such that the state could
[contract with a municipality].
CO-CHAIR WHITAKER announced that he would be happy to insert
intent language in the CS in order to assure the above continues
to be a point of discussion.
Number 2644
REPRESENTATIVE OGG said that would be fine. Representative Ogg
posed a situation in which a municipality wanted to have a
higher sales tax in order to build a hockey rink, for instance.
As this process occurred the tax was reduced to 5 percent and
the municipality determined the goal [of building a hockey rink]
couldn't be accomplished without an additional 1 percent sales
tax. Therefore, the question becomes whether a municipality
should be prohibited from increasing its portion of the tax so
long as there was an election/referendum that authorized the
increase above the tax cap.
CO-CHAIR WHITAKER announced that amendments would be addressed
tomorrow.
REPRESENTATIVE OGG remarked that [the CS] will move
[municipalities] toward meshing [the local and state taxes].
Number 2814
REPRESENTATIVE WILSON inquired as to how many employees will be
required to set up and run this state tax system.
MR. PERSILY estimated that when the state's sales tax office is
at full staff, there would be about 70 people working on the
sales tax. The cost of collection would be about 1.5 percent; 2
percent is viewed as the national benchmark.
REPRESENTATIVE OGG, in response to Representative Heinze,
explained that his thought was that when the state tax is in
place the municipal tax would be capped at 5 percent.
Therefore, if a municipality chose to increase its percentage of
sales tax in order to do a project, that municipality's share
could be increased through a referendum. He clarified that the
aforementioned municipal increase wouldn't carve into the
state's share but would be in addition to the [8 percent].
Number 3035
REPRESENTATIVE GRUENBERG turned to the effective dates, which he
characterized as complex, specifically in relation to Section 21
on page 26. The current language of Version Q could result in
the motor vehicle rental tax provision having its own effective
date because technically it isn't covered by any of the other
effective dates. Therefore, conceivably, Section 21 could be
effective 90 days after [HB 293] is signed into law and even
before the legislation establishing motor vehicle rental taxes
is signed into law and thus [Section 21 could] result in an
immediate effective date of the motor vehicle rental tax.
MR. PERSILY explained that the intent of Section 21 is that if
the car rental tax passes, those car rentals wouldn't be subject
to the general sales tax. "So, the effective date is the
exclusion from sales tax on car rentals takes effect ... on the
day the car rental tax takes effect," he said. In response to
Co-Chair Whitaker, Mr. Persily explained that if HB 293 were to
take effect before the car rental tax does, there would be state
sales tax on car rentals and the general [state] sales tax would
end the day the car rental tax takes effect.
Number 3249
REPRESENTATIVE GARA recalled during his campaign that he was
told that with no exclusions, the [statewide] sales tax would
raise close to $100 million per 1 percent [of tax]. Given
rebates municipalities with a higher sales tax are going to
receive in the first year and the prescription drug and medical
care deduction, does the $300-$375 million projection still
apply. He inquired as to the bottom line numbers on the various
manufacturing scenarios.
CO-CHAIR WHITAKER interjected that the committee isn't sure
[what it's doing] with the manufacturing and transportation
services. Although there are attempts to obtain specific
information, [one must recognize] that [the current information
provides] a range of possibilities rather than probabilities.
MR. PERSILY recalled that last year the assumption was that a
general sales and use tax with traditional exemptions would
amount to about $100 million a year. In the fall 2002 revenue
forecast that number was revised up to $110 million per 1
percent. The communities with a sales tax of over 5 percent
account for only 40,000 residents out of the some 630,000 in the
state. Therefore, the state would lose only a small portion of
the collections during the phase-in. As mentioned, the language
regarding the manufacturing exemption is very tightly written.
He acknowledged that the medical care exemption is a large one.
Depending upon how the manufacturing exemption is addressed, the
legislation could, without the motor fuel tax, still bring in
$300-$375 million. He estimated that the wide range of $300-
$375 million is dependent upon the definition of manufacturing,
specifically in relation to [the exemption's] impact on the
purchase of oil and gas equipment used in exploration and
development in Alaska. Under the current tight definition,
there wouldn't be an exemption for pumps, drilling rigs, well
casings, and drill bits. The industry spends a lot of money on
the aforementioned materials. Furthermore, real property is
exempted while personal property isn't, which would need to be
fully addressed.
Number 3626
CO-CHAIR WHITAKER recalled Representative Heinze's concern
relative to oil industry equipment brought in from [out-of-
state] versus that manufactured here.
MR. PERSILY clarified that regardless of whether the item is
purchased in Alaska or not, if the goods are brought into Alaska
for use, they would be subject to tax. Therefore, he agreed
with Co-Chair Whitaker that those contractors currently in the
business wouldn't find themselves at a competitive disadvantage.
Mr. Persily reiterated that this is going to be dependent up
fully addressing the definition of manufacturing.
REPRESENTATIVE HEINZE recalled from yesterday's meeting that the
parts of the modules wouldn't be taxed whereas the completed
module would be taxed. Therefore, she asked if [under Version
Q], [the parts and the completed modules] would all be taxed.
MR. PERSILY pointed out that it would depend upon whether the
module is being built [by the company that will use it] or is
being built for resale. If the module is being built for
resale, the components would be tax exempt. However, when the
completed module is sold, it would be taxed as opposed to the
company that is building the module for itself and pays tax on
the parts as the module is being built because the parts are
being used in Alaska.
Number 3929
MR. PERSILY acknowledged Representative Rokeberg's point that
there is no manufacturer's list price or receipt for an oil
field service module. Therefore, it would pose some enforcement
and audit problems.
CO-CHAIR WHITAKER remarked that he didn't expect there to be an
answer to this line of discussion before the committee is
compelled to report HB 293 from committee. He announced that
such a discussion will have to take place at the next committee.
REPRESENTATIVE HEINZE asked if there is a reason why this can't
be addressed before the legislation is forwarded. She
identified this as one of the biggest concerns she has with the
legislation. This is huge, she said. She pointed out that a
tax on the Northstar Unit is a $12 million tax. She said she
didn't believe it would be responsible of her to merely let this
concern go.
Number 4049
CO-CHAIR WHITAKER remarked that there is no such thing as a
perfect bill. The committee is in the midst of a process and
the committee cannot insist that the legislation be perfect
before moving it. He pointed out that ultimately there will be
the opportunity to amend and vote on final passage of this
legislation on the House floor. Co-Chair Whitaker said:
But to think that we, at this point in time, can
address that subject adequately and continue the
progress that is necessary given the compelling reason
for us being here in the first place is simply not
possible. It is our intention; it is the wish of the
House leadership, the Senate leadership, and the
administration, that this bill move from this
committee tomorrow morning. We have done good work
here. We cannot continue to keep this bill in this
committee in the hope that it reach perfection before
it moves on. We are part of a process; we are the
first committee of purview and that is the manner in
which we intend to operate. Certainly, if we do not
have the votes to move this ... bill from this
committee, then it will not move and each of you have
that power to exercise.
Number 4217
CO-CHAIR HAWKER turned to the current provisions for
manufacturing and asked if it would be correct to characterize
these as tight provisions with few loopholes.
MR. PERSILY replied yes.
CO-CHAIR HAWKER characterized [Version Q] as a very tight bill
with few exemptions. He acknowledged that as the legislation
moves through the process, special interests may attempt to
negotiate exemptions.
Number 4358
CO-CHAIR HAWKER, in response to Representative Wilson, suggested
that the provisions are tight throughout the legislation. The
scope of the exemption for the manufacturing industry and the
mining industry is found on page 12. However, the parameters
surrounding the assessments would apply in other areas and the
definitions that would apply are throughout the legislation.
MR. PERSILY pointed out that page 22, line 29, contains the
definition of manufacturing, which specifically states that
manufacturing doesn't include construction.
REPRESENTATIVE WEYHRAUCH informed the committee that when
Alabama moved from state tax administration to local tax
administration, there were dramatic collection increases for the
local jurisdictions. He asked if that would argue for a
decentralized collection effort in the localities.
MR. PERSILY said he has heard the same about Alabama, but he
doesn't quite believe it. Therefore, someone has been assigned
the task of researching what happened in Alabama.
REPRESENTATIVE HEINZE mentioned the difficulty she is going to
have with the decision [regarding whether to vote to forward the
legislation or not]. She commented that she wants to be a good
team player.
TAPE 03-29, SIDE B
REPRESENTATIVE HEINZE acknowledged all the hard work that has
gone into this legislation, but emphasized, "Moving this thing
out tomorrow morning just blows me away. ... I can't go there
tomorrow. I'm already feeling the discord inside me. I was
elected to be here to try to put something out. If I give my
vote on this, then that's saying I agreed to this and then I go
home to my constituents. Then who am I doing the disservice
to?"
Number 4612
CO-CHAIR WHITAKER clarified that Representative Heinze will have
the option tomorrow of objecting or not objecting and signing
[the bill report with] a do not pass, pass, or amend. The
aforementioned options recognize that legislation must progress,
but be changed. Furthermore, everyone can work on changing the
legislation as it goes through the process. [Version Q] won't
be the finished product, he said.
REPRESENTATIVE HEINZE said that she understood those options,
but she questioned where she is assured the matter will be
addressed after the legislation leaves this committee.
CO-CHAIR WHITAKER explained that Representative Heinze would
gain that assurance through her own efforts. He acknowledged
that this is a huge policy issue.
Number 4348
CO-CHAIR HAWKER reminded the committee that one of the
committee's charges is to review and consider manners in which
state revenues could be increased. The purview of this
committee is revenue issues. The next committee of referral is
the House Finance Committee, which is charged with the purview
of all financial matters, including revenue and expenditures.
Co-Chair Hawker related his belief that the House Finance
Committee will exercise due diligence in reconciling the revenue
aspects of this [legislation] with the state's expenditure
requirements. He opined that the House Finance Committee is the
appropriate committee to continue with the next level of
discussion in this legislation. He commented that it is
appropriate to move this legislation forward, especially
considering the constraints that arise as the session ends.
REPRESENTATIVE GRUENBERG directed attention to page 12, line 27,
and the following language: "ingredient or component part of
the product". He pointed out that there is no definition and
thus he wasn't sure of the language's meaning when applied to
various businesses. Therefore, perhaps it should be defined in
some manner. He said he didn't believe there was the desire to
spawn a new industry, a generation of tax lawyers.
CO-CHAIR WHITAKER announced that the drafters will be available
tomorrow.
REPRESENTATIVE GRUENBERG then turned to the definition of
manufacturing, which is defined on page 22, line 29 through page
23, line 1. Representative Gruenberg expressed concern that the
terms "combining or processing components or materials" is broad
enough. Furthermore, Representative Gruenberg said that he,
too, is concerned about passing this legislation out of
committee tomorrow because the committee has only heard from one
segment of Alaska, the municipal governments. The committee
really hasn't heard from the business community or the oil
industry. He opined that the policy decision to not involve
real property is worthy of discussion; the question is whether
the [legislature] wants to exclude, from a general tax,
intangible property.
REPRESENTATIVE WILSON asked if any of the language defining
manufacturing includes oil.
MR. PERSILY answered that if the oil is processed at a refinery,
the definition of manufacturing would include oil. However, if
the oil is merely lifted from the ground, put in a pipe, and
sold, it wouldn't really be considered manufacturing under the
definition in [Version Q]. Mr. Persily clarified that he was
referring to the equipment used [in the oil industry].
CO-CHAIR WHITAKER specified that under the current language, oil
"stuff" is taxable.
MR. PERSILY clarified that under this definition of
manufacturing, all of the equipment [used to drill for oil]
would be subject to the sales tax. However, he noted that this
interpretation would be subject to further clarification from
the legislature.
MR. PERSILY, in response to Representative Rokeberg, said that
the exemption of real property is in the definition that this
legislation only applies to tangible personal property, and
therefore real property would be exempt.
CO-CHAIR HAWKER pointed out that the related language is on page
8, line 19.
MR. PERSILY explained that [Version Q] doesn't specify an
exemption for real property because it is not defined as a
taxable item.
REPRESENTATIVE ROKEBERG inquired as to [how this legislation
deals] with the easements to real property. [Indisc.].
MR. PERSILY remarked that it would depend upon whether those
improvements become a permanent part of the real property as
opposed to fixtures and equipment that wouldn't. He said that
Representative Rokeberg's question is worthy of further research
and clarification.
REPRESENTATIVE ROKEBERG turned to the intrastate transportation
of petroleum products and asked if the transportation itself
would be taxed similar to the pipeline tariff.
MR. PERSILY explained that under Version Q if it's subject to a
single contract for the transportation interstate, it would be
exempt. Under Version Q, intrastate [transportation] would be
subject to the tax.
REPRESENTATIVE ROKEBERG pointed out that from the North Slope to
the North Pole is intrastate transportation.
MR. PERSILY, in further response to Representative Rokeberg,
said that if the state is selling the oil at the wellhead from
Prudhoe Bay to Williams, then he surmised it would be Williams'
oil. Mr. Persily said that he would add this matter to the list
of questions to consider.
REPRESENTATIVE ROKEBERG recalled that currently there is a
ceiling on the real property tax mill rate in the state. He
asked if there is a statewide cap on that.
MR. PERSILY said that he wasn't knowledgeable in that area.
Number 3009
REPRESENTATIVE ROKEBERG expressed concern that if there is too
low of a cap [on the tax], municipalities may raise their real
property tax in order to make up for the loss of cash flow due
to the 8 percent tax cap. He indicated the need to research
this. Representative Rokeberg asked if the statute prohibits a
municipal government from imposing an income tax.
MR. PERSILY answered that he didn't know Title 29 well enough to
know whether it gives municipal governments the authority to
impose an income tax, although he did know that it does give
them the authority to impose a sales and use tax, property tax,
and special excise tax. He said that he has never seen the
words "income tax" in a municipality's specific authority.
Therefore, he surmised that the question becomes whether a
municipality can impose an income tax absent a specific
authority or prohibition against it. He said he would probably
defer to Legislative Legal and Research Services.
MR. PERSILY, in response to Representative Rokeberg, said that
Representative Rokeberg's amendment tying the sales tax rate to
natural resource revenue is on someone's list to offer
assistance.
Number 2846
REPRESENTATIVE SEATON turned attention to page 12, line 10,
which provides a $5,000 exemption on motor vehicles, watercraft,
aircraft, and mobile homes. Representative Seaton acknowledged
that some view a sales tax as fair due to an individual's choice
to buy or not. However, in this legislation the individual
purchasing an economical motor vehicle will actually subsidize
the purchases of high-end vehicles. This cap says that if an
individual purchases expensive items, that individual doesn't
pay much tax whereas those who purchase an economical item will
pay a higher percentage of tax. He inquired as to why there is
a cap on these [exempt items].
REPRESENTATIVE GRUENBERG inquired as to why that language is
there.
CO-CHAIR WHITAKER ruled that the above wouldn't be discussed
tonight.
Number 2609
REPRESENTATIVE OGG directed attention to page 4, line 5, and
requested that it be explained with examples that include fish
and perhaps products in a store, for which the city would want
to levy a specific excise tax. He asked if the state would have
a 3 percent tax on these items and then the city could also have
a tax on it.
MR. PERSILY said that municipalities throughout the state have
special taxes such as the bed tax, the fuel transfer tax, the
raw fish tax, the car rental tax, tobacco products, and alcohol.
He said he understood page 4, line 5, to mean that a
municipality, city, or borough could levy a specific tax on any
single category in addition to the general sales and use tax.
REPRESENTATIVE OGG surmised that the municipality, city, or
borough would continue to have existing exemptions under the
sales tax. He further surmised that these entities could have
an excise tax on clothing, for example, even though it was taxed
generally as a sales product.
MR. PERSILY explained that the entity would continue the general
sales and use tax with an additional [special] excise tax on the
specified item.
REPRESENTATIVE OGG turned attention to page 12 and specified
that he was going to refer to the fishing industry, the largest
employer in state. He pointed out that on page 12, line 24,
"Exemption for a sale to a miner or manufacturer" and asked if
the seafood processing industry would be included under that.
MR. PERSILY answered that he believes it would, but only to the
extent of the ingredients or components. The equipment that
operates the canning line wouldn't be under this tight
definition. With regard to the question of what the definition
of "manufacturing" includes, Mr. Persily confirmed that it would
include the timber and fishing industry.
Number 2212
REPRESENTATIVE ROKEBERG continued with the discussion regarding
manufacturing. He posed an example in which the manufacturer,
Red Dog [Teck Cominco Alaska, Inc.], exports ore to a warehouse
within the company's facility and doesn't sell the ore. He
posed another example in which a fish packer cans fish then
moves it from Alaska to Seattle, Washington, to store it for
resale. He asked if there is an incidence of sales (indisc.) at
any of those points.
MR. PERSILY said he didn't believe so as currently written.
Again, the equipment used [would be taxed] while the transfer
from one storage to another wouldn't [be taxed] because it's not
the final sale and thus wouldn't be subject to a sales tax. If
a natural resource is being sold to be processed for eventual
resale, it wouldn't fall under this because there would be a
resale exemption certificate.
REPRESENTATIVE ROKEBERG posed a situation in which some Copper
River reds are sent to the Pike's Place Market in Seattle,
Washington, they wouldn't be [taxed] because they're going to be
resold.
MR. PERSILY said that would be his understanding.
Number 2033
CO-CHAIR HAWKER related that the intent was to craft a document
that taxes something only once. Co-Chair Hawker recognized that
as this legislation moves through the process, there will
certainly be a lot of "carve outs" and clarifications in statute
as well as regulatory interpretations.
REPRESENTATIVE SEATON asked if it's possible to craft something
in this legislation as an export tax. Generally, Alaska exports
natural resources and yet those items aren't being taxed.
CO-CHAIR WHITAKER said he didn't have an answer, but he opined
that [natural resources] would be a separate class that would be
subject to a policy call.
REPRESENTATIVE ROKEBERG mentioned that international treaties
address those issues.
REPRESENTATIVE OGG reminded the committee that the state already
has a 3 percent raw fish tax.
Number 1708
REPRESENTATIVE GARA turned to the exemptions in Version Q. With
regard to rental exemptions, he related his understanding that
an apartment or house that is rented won't be taxed.
MR. PERSILY indicated that to be the case because it's real
property. The same would apply to commercial office rentals and
land rentals. In further response to Representative Gara, he
specified that housekeeping services and private school tuition
would be taxed unless provided by an Internal Revenue Service
501(c)(3) nonprofit, in which case those would be tax exempt.
REPRESENTATIVE GARA turned to the mining and manufacturing
exemption. He recalled that the two examples have been
regarding purchases by an oil company and purchases of services
by a pipeline company. He used ConocoPhillips Alaska, Inc., as
an example and inquired as to what portion of the things the
company is purchasing will be taxed under this exemption and
what portion of things won't.
MR. PERSILY answered that most everything will be taxed. If
ConocoPhillips Alaska, Inc., was running a manufacturing
facility, the components or ingredients [would fall under the
exemption]. He noted that a refinery would be a manufacturing
facility. Under this legislation, the equipment - from the
office copier to the drilling rigs - would be subject to the
tax.
REPRESENTATIVE GARA continued with the disparity in pipeline
transportation services.
Number 1440
MR. PERSILY clarified that transportation is a service, whether
the goods are being put on a truck, on a railroad, or in a
pipeline. If the aforementioned is an instate service, it's
subject to the sales and use tax on the service under the
current legislation.
REPRESENTATIVE GARA inquired as to why the interstate service
isn't being taxed.
MR. PERSILY opined that there are more complex legal questions
when one reviews taxing interstate commerce. The question
becomes how far the state can reach to tax something that isn't
in the state. Mr. Persily confirmed that the interstate
pipeline services won't be taxed, which is referenced on page
13, line 21.
Number 1316
MR. PERSILY, in response to Representative Heinze, confirmed
that under the [recent amendments to the] Stranded Gas
Development Act the sales tax is negotiable. Therefore, the
sales tax may negotiate a contract for payment in lieu of taxes
and would nullify any state or municipal sales tax that might
otherwise apply. He related his belief that it has to be a
single contract. Furthermore, this Act only applies to natural
gas regardless of how the gas is eventually exported from the
state.
REPRESENTATIVE HEINZE highlighted her interest in how this sales
tax would impact the industry, especially in this time when more
exploration is desired.
CO-CHAIR WHITAKER pointed out that the Stranded Gas Development
Act allows for exemptions through negotiation for virtually any
gas project. Nothing here will inhibit a project. As the
legislation stands, it will have a significant affect on all
economic activity in the state, and therefore the committee
needs to be sure not to prohibit future economic growth.
Number 0839
REPRESENTATIVE WILSON surmised that Co-Chair Whitaker is saying
that "we don't have to put it in here because the Stranded Gas
Act ... takes care of that."
CO-CHAIR WHITAKER answered, "Specifically relative to a
potential gas project. The Stranded Gas Act allows, through
negotiation, an exemption given that the proposers of a project
can convince the administration and then convince the
legislature."
REPRESENTATIVE GRUENBERG remarked that on page 10, lines 23-24,
seem to be a clear infringement on [freedom of] speech. He
asked if there was a reason the provision was drafted in that
manner.
MR. PERSILY related that [the department] views this as a
consumer protection measure allowing the consumer to know the
advertised price of an item [does not include] tax.
Number 0620
REPRESENTATIVE GRUENBERG suggested that if the above is the
intent, then the language needs to drafted to specify that
there's nothing to prohibit [including the tax in the price],
but the consumer must be informed either way. He mentioned that
he would work on the aforementioned. Representative Gruenberg
turned to page 11 and pointed out that on line 4 transactions
involving the United States are exempt while line 6 specifies
that transactions involving an instrumentality of the state is
exempt. However, he inquired as to whether the intent is to
exempt transactions involving the state.
MR. PERSILY related his understanding that the intent of the
provision would be to apply the tax to state and municipal
entities.
CO-CHAIR HAWKER noted that he has spent a fair amount of time
with an attorney on this matter. He pointed out that AS
39.52.960 "(12) 'instrumentality of the state' means a state
agency or administrative unit, whether in the legislative,
judicial, or executive branch, including such entities as the
University of Alaska, the Alaska Railroad, and any public or
quasi-public corporations, boards, or commissions; the term
includes municipalities;".
REPRESENTATIVE GRUENBERG pointed out that Title 39 deals with
public contracts whereas this is in Title 43. Although he
recognized that most of these would be contracts, he suggested
that it may need to be specified in this legislation.
Representative Gruenberg returned to the exemption on page 8,
line 20, which specifies that the sales and use tax would
involve tangible personal property. However on page 11, line
19, there is an exemption for intangibles. He asked if the
intent was to tax those intangibles that aren't listed as such
in this legislation.
MR. PERSILY explained that [the language on page 11, line 19]
specifies that the state specifically exempts those items listed
even if construed as tangible personal property.
REPRESENTATIVE GRUENBERG referred to page 13, line 25, and
inquired as to why it has to be a single contract because one
could combine or break up contracts to receive an exemption.
MR. PERSILY said he would work on obtaining Representative
Gruenberg some answers on that. Mr. Persily acknowledged that
the transportation services and interstate provisions need
clarification.
Number 0122
REPRESENTATIVE SEATON turned attention to pages 11-12, which
address isolated and occasional sales. He expressed the need to
tighten this language such that it refers to occasional sales by
individuals rather than large stocks from companies.
TAPE 03-30, SIDE A
REPRESENTATIVE SEATON indicated that he viewed the current
language [on page 11-12] to be a loophole.
Number 0133
REPRESENTATIVE WILSON inquired as to what communities without
any property that is taxable for property tax would do once [the
state sales tax] is in place and the community reaches the 8
percent cap.
CO-CHAIR WHITAKER said that although that has been discussed,
there isn't any language that addresses it in the legislation.
He mentioned that Co-Chair Hawker is probably going to offer an
amendment to deal with that.
MR. PERSILY explained that although a community could run up
against the cap on the general sales and use tax, the community
could impose any special tax on specific goods or services.
CO-CHAIR HAWKER pointed out that such a situation wouldn't come
into play for four years, which would seem to allow for time to
achieve some consensus from both the state and municipalities.
He indicated that there are many ways to tax a community outside
of this legislation.
REPRESENTATIVE ROKEBERG related his understanding that
municipalities could impose a special assessment on a particular
item, such as perhaps a toilet.
MR. PERSILY replied that such could be the case.
Number 0433
REPRESENTATIVE SEATON inquired as to the reason [the tax cap]
was set at 8 percent.
MR. PERSILY opined that the intent of the drafters was to use 8
percent so that during the phase-in period, each community -
even those such as Wrangell - would pay something to the state.
CO-CHAIR WHITAKER agreed and added that the intent was to
provide "as much leeway as possible."
CO-CHAIR HAWKER informed the committee that during research and
analysis there was nationwide review of the level of caps in
states. Typically, those maximum rates were in the 7 percent
range. As a matter of judgment, 8 percent seemed defensible and
a rationale basis. Particular consideration was given to the
fact that Alaska doesn't have a tandem income tax.
REPRESENTATIVE WILSON recalled reading somewhere that when an
income and sales tax are in place, economist specify that beyond
the 8 percent level, the economic viability of the community is
put in jeopardy.
Number 0750
REPRESENTATIVE KOHRING expressed the need for the committee to
consider sunsetting this legislation in 3-5 years in order to
evaluate if it works or whether a new route is necessary.
Furthermore, Representative Kohring expressed his belief that
the public should vote on legislation of this nature because
this is spending the public's money. He announced that he would
be amendable to amendments on the aforementioned issues.
REPRESENTATIVE GARA asked if there has been assessment regarding
the affect on sales and the decrease in sales to local business
that might follow the implementation of a state sales tax.
MR. PERSILY replied no and added that the Tax Division doesn't
have research staff large enough [to address that].
CO-CHAIR WHITAKER commented that it would probably be fair to
conjecture that there may be some impact. It would also be
fair, he said, to point out that 45 states have sales tax and
commerce continues.
REPRESENTATIVE GARA interjected that Alaska's prices are already
high and thus Alaska isn't like every other state, which is the
source of his concern.
Number 0955
REPRESENTATIVE MOSES inquired as to how [the state] would obtain
sales tax from a nonresident employee working on the North Slope
who receives meals, housing, and a vehicle [from the company].
MR. PERSILY replied that the sales tax would only be collected
on the purchases made in Alaska by the nonresident employee.
[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
6:55 p.m.
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