Legislature(1993 - 1994)
03/22/1994 01:37 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE LABOR AND COMMERCE COMMITTEE
March 22, 1994
1:37 p.m.
MEMBERS PRESENT
Senator Tim Kelly, Chairman
Senator Steve Rieger, Vice-Chairman
Senator Bert Sharp
Senator Georgianna Lincoln
Senator Judy Salo
OTHERS PRESENT
Senator Drue Pearce
Senator Loren Leman
Senator Jay Kerttula
Representative Mike Navarre
COMMITTEE CALENDAR
SENATE BILL NO. 320
"An Act relating to occupational licensing boards and commissions;
and relating to architects, engineers, and land surveyors."
SENATE BILL NO. 356
"An Act excluding certain recreational activities sanctioned by an
employer from coverage provided under workers' compensation; and
providing for an effective date."
SENATE BILL NO. 185
"An Act relating to the limitations period for assessments for
certain state taxes, and for collection, after assessment, of taxes
due the state; and providing for an effective date."
PREVIOUS SENATE COMMITTEE ACTION
SB 320 - NO PREVIOUS ACTION.
SB 356 - NO PREVIOUS ACTION.
SB 185 - See Judiciary minutes dated 4/20/93, 4/21/93
and 4/23/93.
WITNESS REGISTER
George Davidson, Chairman
Architects, Engineers and Land Surveyors Board
P.O. Box 32317
Juneau, Alaska 99803
POSITION STATEMENT: Testified on SB 320.
Robert M. Erickson
Teamsters Local 959
Technical Engineers Local 959
306 Willoughby Ave.
Juneau, Alaska 99801
POSITION STATEMENT: Testified on SB 320.
Patrick Kalen
AELS Board
1041 Chena Ridge
Fairbanks, Alaska 99701
POSITION STATEMENT: Supports SB 320.
Bill Mendenhall
AELS Board
1907 Yankovich Road
Fairbanks, Alaska 99709
POSITION STATEMENT: Supports SB 320.
Charles E. Cole, Attorney
404.5 Cushman
Fairbanks, Alaska 99701
POSITION STATEMENT: Supports SB 185.
Lawrence Kimball
Cook Inlet Region, Inc.
2525 C Street, Suite 500
Anchorage, Alaska 99501
POSITION STATEMENT: Opposes SB 185.
Commissioner Darrel Rexwinkel
Department of Revenue
P.O. Box 110400
Juneau, Alaska 99811-0400
POSITION STATEMENT: Supports SB 185.
Joe Householder
Alaska Oil & Gas Association
1201 W. Fifth Street
Los Angeles, California 90017
POSITION STATEMENT: Opposed SB 185.
ACTION NARRATIVE
TAPE 94-17, SIDE A
Number 001
CHAIRMAN TIM KELLY called the Labor and Commerce Committee meeting g
to order at 1:37 p.m.
SENATOR KELLY introduced CSSB 320 (OCCUPATIONAL LICENSING) to
committee and invited the sponsor, SENATOR LOREN LEMAN, to present
his bill to committee.
SENATOR LEMAN explained SB 320 deals with some revisions to the
statutes regarding architects, engineers, and land surveyors, and
was brought to his attention by the Board of Registration. He
explained there was a number of issues in the bill, minor, and
mostly housekeeping in nature, but he preferred to let the chairman
of the board, GEORGE DAVIDSON, testify on the changes.
SENATOR LEMAN did note that he has proposed three amendments since
the bill was originally introduced, which would delete Section 1
from the bill, first of all. This was because of the impact of
changing terms from the statute would also inadvertently change
some 30 or 40 other boards, which was not intended.
SENATOR LEMAN explained the other change was to remove Section 3 in
the original bill, which contained an issue that would create
controversy in a relatively non-controversial bill. He further
explained Section 8 in the original bill changes the definition of
the term, "practice of land surveying." He said it reflected some
recent board action, and the new definition reflects the new
definition from the board regarding the practice of land surveying.
MR. LEMAN suggested the adoption of the new committee substitute,
and said that MR. DAVIDSON would speak to the changes, as well as
a land surveyor, PATRICK KALEN from Fairbanks, who suggested some
of the changes.
Number 053
SENATOR KELLY questioned the educational requirements needed to be
a land surveyor. MR. LEMAN suggested this could best be answered
by MR. DAVIDSON, but a surveyor could have no education and eight
years of experience to be qualified to take the exam to be a land
surveyor. If you have four years of education, he said you would
only need four years of experience to take the exam. He said there
was no minimum amount of education currently required.
SENATOR KELLY asked, in reference to page 2, Section 4 in the
proposed committee substitute, where the amendment is in that
section. SENATOR RIEGER pointed to an or on line 21, and SENATOR
LEMAN explained the change.
SENATOR RIEGER expressed curiosity about the definition of
"practice of land surveying" in the last section in the bill, and
asked if it triggered oversight by the board. He thought perhaps
it precluded a person from doing certain things unless certified.
He was also curious about the first addition of the teaching of
land surveying courses at an institution of higher learning, in the e
same section. He wanted to know what it does in relation to
ability of a person to teach and a university's ability to recruit
the person of their choice to teach land surveying courses.
Number 110
SENATOR LEMAN referred to a previous bill regarding the teaching of
higher level courses in engineering, to explain it would allow the
people who teach to count that work experience toward the work
which would permit them to qualify to take the exam. He gave an
example to explain the inclusion.
SENATOR KELLY then called on GEORGE DAVIDSON, who indicated he had
brought a letter on behalf of the Architects, Engineers and Land
Surveyor Board, which outlines the board's position.
MR. DAVIDSON reviewed the bill as previously submitted, and then
explained the board is experiencing difficulty with longevity, or
continuity. He also explained the board represented about 5,000
architects, engineers, and land surveyors throughout the State, and
although he is the senior member on the board, he has been on the
board less than four years.
Number 160
MR. DAVIDSON expressed concern the lack of historic memory in
dealing with the membership, and he explained it was further
compounded by only having one state employee. He further explained
this position has changed regularly in the last year, and the board
was currently working with their fourth staff person. He indicated
a desire by the board to provide additional continuity by reducing
the frequency found in changing board membership, and he gave an
example of replacing members who have resigned. Under this bill,
the term of a board member would still be under ten years, which he
didn't think was excessive.
MR. DAVIDSON explained the remainder of concerns were housekeeping
in nature, and he offered to review the proposed changes.
SENATOR SALO asked which part of the bill changed the time limit of
board member terms. SENATOR KELLY explained the provision was not
in the proposed committee substitute, and he said MR. DAVIDSON has
suggested a different approach.
Number 199
MR. DAVIDSON proposed that a board member, who has served less than
two years of a four year term, is not be considered to have served
a full term, and he explained how it would work. He described the
makeup of the board as requiring one of the engineers appointed
would be a mining engineer.
MR. DAVIDSON said the board has had difficulty in filling that
position, which is presently filled by PHIL HOLDSWORTH, a long time
mining engineer. He reviewed the board discussion on appointing
engineers, and it was decided to request three engineers on the
board to give the governor more flexibility on the position, such
as a need for a petroleum engineer.
MR. DAVIDSON, in reference to Section 3, included the word only to o
indicate that board members would be removed only for misconduct,
in an effort to allow the board to build up some historic memory.
MR. DAVIDSON explained that changes in Section 4, with the deletion
of lines 13 through 16 of the original bill, will allow for similar
education and work experience for registration of a land surveyor
as is required for engineers.
He further explained there would be a need for a regulation change
which would require 12 years of experience for registration as a
land surveyor, and was requested by the land surveyors in the
interest of consistency with engineers. He gave some examples of
the impact of the changes.
Number 240
In Section 5, MR. DAVIDSON proposed the deletion of some language
on lines 22 to 26, which was put in years ago when the Council of
Engineering Examiners was proposing another method of registration,
but the alternate form of registration never took place.
MR. DAVIDSON, in reference to Section 6, EVIDENCE OF PRACTICE, said
the only change there was the addition of the word or between
paragraph (2) and (3), which comes at the request of the attorney
general's office. Without the or they are finding that people are e
able to sneak through because they don't meet all of the terms of
both paragraphs. It was felt that both paragraphs were separate
criteria for evaluating evidence of practice.
MR. DAVIDSON explained, in reference to Section 7, paragraph (9),
line 14, it came at the request of the surveyors and land survey
professors, and it removes the licensure exemption for land survey
professors at postsecondary educational institutions. He said it
would also increase the requirements and the quality of service
from the school, while allowing the professors to get credit for
their education to apply towards their license.
SENATOR KELLY asked how they could be teaching if they were
licensed.
MR. DAVIDSON answered that a professor is allowed to work under the
direction of other registered people.
SENATOR SHARP asked if it was related to a problem several years
ago when land surveyors were brought in from other places, who were
not registered and couldn't teach until they were licensed.
MR. DAVIDSON explained the proposal was for all professors in
engineering, architecture, and land surveying, but was opposed by
the University of Alaska as a restriction to recruiting. He said
the change would only apply to the land surveyors at the request of
the survey department at the University, and approved by the board.
SENATOR KELLY asked about the language that allows land surveyors
to go underground, as to why it was necessary. MR. DAVIDSON
explained the circumstances under which it would be necessary such
as for sewer lines. SENATOR KELLY asked who did the underground
work before, and did they have to be a certified mining engineer.
MR. DAVIDSON answered it was done by both civil engineers and land
surveyors.
Number 296
MR. DAVIDSON explained it had resulted from some of the boroughs
beginning to enforce the exact letter rather than the customary
practice, and he cited examples from Fairbanks. He thought PAT
KALEN, a land surveyor from Fairbanks and instrumental in dealing
with the court in this, would be able to respond more specifically.
SENATOR RIEGER was bothered by Section 6, because although adding
new descriptions to the practice of land surveying might broaden
the scope of practice, he thought the flip side is that anyone who
is not registered as a land surveyor is prohibited from doing any
of the things in Section 6, unless they fall into the exceptions.
He felt the legislation would force registration.
MR. DAVIDSON pointed to the prior list of exemptions in Section 5
of the committee substitute as intended to protect those normal
practices done by contractors, and he didn't believe the new
language encompasses more work than currently being done by the
surveyors, but makes them legal.
SENATOR RIEGER and MR. DAVIDSON discussed the provisions in Section
6 in relation to both civil engineers and land surveyors. SENATOR
RIEGER quoted the bill as saying a land surveyor may not practice
land surveying in the state unless that person is registered.
SENATOR KELLY suggested the committee return to his question, and
asked to hear from ROBERT ERICKSON.
Number 351
MR. ERICKSON presented some comments dealing only with Section 4,
which SENATOR KELLY explained was Section 2 of the committee
substitute, entitled GENERAL REQUIREMENTS AND QUALIFICATIONS FOR
REGISTRATION.
MR. ERICKSON read: "This testimony addresses concerns we have for
Senate Bill 320, in particular AS 08.48.171, page 2, lines 13
through 16. (of the original bill.) The deletion of these four
lines in the current statute will negatively affect some of our
technical engineers, our term for surveyors, not land surveyors,
but construction type surveyors.
I would first like to introduce myself and our organizations, then
to specify the damage that maybe done.
I am the business representative for Technical Engineers Alaska
affiliated with Teamsters Local 959, and represent approximately
150 construction surveyors statewide, 23 members are registered
land surveyors in the State of Alaska. Throughout the years, our
members have enjoyed employment on projects throughout the state.
The nature of the majority of these projects require working away
from home.
If a technical engineer wishes to test for a license, meaning a
land surveyor, he must be able to submit evidence of more than
eight years of any combination of education, experience, or
training. Three years must be in responsible control of an
operation related to land surveying. Operations of a construction
survey nature do not count towards this three years requirement.
In essence a technical engineer must leave the construction survey
projects and spend at least three years land surveying.
Historically, five years of land surveying on construction projects
have given our applicants enough technical experience to pass the
non legal parts of the examination. Most have had to utilize
courses from the University to help them pass the legal questions
put forth in the exam. While it would be acceptable to substitute
a four year degree for the experience, this is often an unsuitable
choice due to reasons of finance with tuition, supporting families
and location. Quite often our work takes us away from computing
distance to campus. We are of the understanding that if the eight
years is struck from the statute, then regulations requiring 12
years will be promulgated.
We're convinced that adding four more years of experience in order
to take the examination, is unreasonable, and acts as a restraint
on our members who wish to become licensed. If five years
experience in the construction surveying does not enable you to
have minimum qualifications, which all passing the examination
purports to guarantee, it is unlikely that nine years would improve
your qualifications. You can grasp the fundamental technical
aspects of surveying, or you cannot, and surely it can be found
within the current eight year requirement. Three years responsible
control and 5 years of other experience. We ask this statute to
remain as currently written."
MR. ERICKSON concluded by offering to answer questions.
SENATOR RIEGER referred to the first page of MR. ERICKSON'S
testimony to ask about his remarks on "then regulations requiring
12 years will be promulgated."
MR. ERICKSON referred to testimony from MR. DAVIDSON, but he
explained that MIKE KENNY had talked to PATRICK KALEN, an
instructor at the University of Alaska, and other people in the
field on the board. MR. KENNY was told this was what was probably
going to happen, to go from eight years to 12 years. It was
clarified that MR. KALEN is a past board member.
Number 403
SENATOR KELLY asked MR. DAVIDSON if he indicated there is an idea
afloat to promulgate regulations requiring 12 years experience
instead of eight.
MR. DAVIDSON said that was the proposed amendment, and he reviewed
the chart of requirements before registration in the regulations.
SENATOR KELLY asked if this would limit membership in their
profession, and MR. DAVIDSON said it would if they don't have the
education.
SENATOR KELLY next turned the network to Fairbanks, to hear
testimony from PATRICK KALEN.
MR. KALEN addressed two issues, beginning with the definition of
land surveying as to conflict between the land surveyors and
engineers. He explained it had been raised as an issue, and how it
was resolved. The end results was to make it clear the board can
certify as to the accuracy to the measurements that we take. We
don't think it would limit anyone from taking those kinds of
measurements for their own use, but they are not admissible in a
court hearing.
MR. KALEN explained it came from the MatSu Valley, and proposed by
a land surveyor who had difficulty in testifying as to the accuracy
of measurements. He further explained equal weight was given to
the testimony of a realtor for different measurements.
MR. KALEN, in his second issue about the eight year limitation in
statute, said this had been requested by the land surveyors,
because some things are different today than when the land
surveyors were separated from engineering as a practice. He said
they now have a four degree program available in Alaska, while at
the same time surveying has become a great deal more complicated
than previously. He gave some history on the four year degree
programs in a dozen states, and he reviewed the results.
MR. KALEN recognized there should be a route for those who are
unable to get the degree and use the same rules as the civil
engineers with 12 years of experience.
SENATOR KELLY interrupted to ask if a person needs a degree in
order to be a land surveyor.
Number 453
MR. KALEN explained this was not correct, but there was a degree
program available, and the board was interested in moving in the
direction of legitimizing that degree to make it part of the
requirement toward becoming a land surveyor. He further explained
how this was hampered by the limitation in statute which makes it
impossible for the Board of Registration to formally recognize
education.
SENATOR KELLY asked if this was being requested, and MR. KALEN
explained why it wasn't presently counted toward land surveying
experience. He explained this made it difficult for the board to
evaluate applicants because construction surveying is not land
surveying, but he thought the education component would broaden the
options of getting a degree to count towards registration. He also
thought they were providing a better route, and he outlined the
complications in surveying since the eight year limitation was put
into statute. He hoped the committee could adopt the changes.
SENATOR KELLY asked it it was in regulation. MR. KALEN said he was
correct and explained how it was directed in regulation. They
clarified the provision.
SENATOR RIEGER wondered why, by regulation, the board can count
education towards the experience necessary, but can't count
teaching of surveying courses at an institution of higher learning
as experience towards the required time.
MR. KALEN opined it was a hold over from a time when land surveying
was split from engineering, and wasn't really considered, but he
referred to the definition of architects and engineers which
considers teaching as experience.
Also from Fairbanks, SENATOR KELLY invited BILL MENDENHALL to
testify.
MR. MENDENHALL introduced himself as the current land surveyor
member of the Board of Architects, Engineers, and Land Surveyors,
and recently replaced MR. KALEN. He supported the testimony from
MR. KALEN, and explained they had both worked closely with the
Alaska Society of Professional Land Surveyors, all of whom felt
there should be a greater emphasis on formal education. He said
this followed the national trend, and he cited some states as
recently requiring a four year surveying degree.
MR. MENDENHALL explained the board had urged people to get more
formal education, and he reviewed the information from the Alaska
Administrative Code which would allow someone with four years of
education and four years of experience to take the exam. If a
person had a two year surveying degree, such as an associates arts
degree, and eight years of experience for a total of ten, that
person could take the exam.
MR. MENDENHALL explained, for a person with no formal education,
that person would need 12 years of experience to take the exam.
The present law would not allow, since about 10 years ago, for land
surveyors only, but it would permit a land surveyor to eight years
total experience and education. He felt this should be upgraded to
give a higher status for requirements for surveying, and he claimed
it had been reviewed by many people, and endorsed by the Society of
Professional Land Surveyors. He reminded the committee that a
person with no formal education still has the option to take the
exam, but just requires more experience.
MR. MENDENHALL said this was patterned exactly after the
requirements for professional engineers. In the State of Alaska,
a person with a four year degree in surveying and four years of
experience may sit for the exam. A person with five years of
education or more, a master's degree, and three years experience
may sit for the exam. A person with mo formal education in
engineering must have 12 years of experience to sit for the exam.
He claimed they were just trying to apply the same rules to the
land surveyors as has long been applied to the professional
engineer category.
SENATOR LINCOLN expressed some confusion over Section 2 of the
committee substitute which deletes the requirement of eight years
of experience with any combination, but leaving in the submission
of evidence satisfactory to the board on education, experience, or
training. In the previous testimony, she questioned whether eight
years of experience was being substituted for 12 years.
Number 543
MR. MENDENHALL explained, before that could be done, there would
have to be hearings on the administrative regulations, and he
didn't know what would happen beyond this. He reiterated the
present Alaska statute says that surveyors can't be required to
have more than eight years combination of education and experience.
He said they would like to have that provision removed to allow the
board to strengthen the requirements in the future. He claimed the
proposed legislation would not accomplish this, but would just make
it possible to be done through the administrative code after a
proper hearing.
SENATOR LINCOLN thought it seemed ambiguous to leave it to the
satisfaction of the board, but does not speak to exactly to the
number of years, the degree, or experience. She felt it was left
in limbo.
MR. MENDENHALL quoted the regulation regarding the engineers and
architects are also right now in limbo. He suggested nothing could
be done because of the current wording in statute.
There being no further testimony on SB 320, SENATOR KELLY said
staff would work on the legislation for a future date.
SENATOR KELLY brought a proposed committee substitute for SB 356
(WORKERS COMPENSATION FOR RECREATIONAL ACTIVITIES) before
committee, and asked his committee aide, JOSH FINK, to review the
changes in the committee substitute.
MR. FINK explained the committee substitute would do two things.
Section 1 would exempt amateur sports officials employed on a
contractual basis from workers compensation coverage. Section 2
would remove employers from workers compensation liability for
their employees if their employees are voluntarily participating in
a recreational activity sponsored by the employer.
MR. FINK stated this legislation was combined with two bills from
the House side. Section 1 was HB 290 (EXEMPT SPORTS OFFICIALS FROM
WORKERS COMPENSATION), and Section 2 was REPRESENTATIVE NAVARRE'S
HB 302 (WORKERS COMPENSATION FOR RECREATIONAL ACTIVITIES). He
offered to address Section 2 until REPRESENTATIVE NAVARRE arrived.
MR. FINK explained that Section 1 arose out of a situation in
Anchorage, when prior to 1992, the Anchorage Sports Association
considered its umpires, referees, time keeps, etc., not as
employees, but hired on a contractual basis to provide services
during the summer. In the fall of 1992, the insurance carrier for
the Anchorage Sports Association did an audit, and claimed these
were employees of the association, .....
TAPE 94-17, SIDE B
Number 001
... and you've got to pay the workers compensation premiums. The
Anchorage Sports Association contested their ruling, and it went to
the Division of Insurance which supported the insurance carrier
contention they were employees.
MR. FINK explained the National Council on Compensation Insurance
(NCCI) sets the rates, then gave a classification of these amateur
sports officials of extremely high risk, the same as a professional
athlete. The end results would mean a compensation rate of 15 to
54% of their compensation to these sports officials in workers
compensation. This was appealed to the NCCI to take another look
and to reclassify, but all appeals were denied. A decision is
currently pending from the attorney general's office, but there
does not seem to be an optimistic result from this request.
SENATOR KELLY explained the bill talks about people who are moon-
lighting from daytime employment, and the remuneration for these
jobs is minimal.
MR. FINK explained the bill would exempt these amateur sports
officials if they are performing their services if a team does not
receive compensation. He said the bill would keep these sports
associations in business, and he reviewed letters of support from
sports associations from across the state.
REPRESENTATIVE NAVARRE explained Section 2 was from his bill on the
House side, and would change the definition section of the workers
compensation statutes. He gave an example of Arbys, a family owned
business in his district to defend his proposed changes.
SENATOR KELLY asked if employees from Arbys were allowed to play on
the team, and REPRESENTATIVE NAVARRE explained the sponsorship of
a team.
Number 043
SENATOR SALO asked REPRESENTATIVE NAVARRE for clarification on the
playing fields and the court's interpretation.
SENATOR LINCOLN expressed interest in the remote job site aspect of
the legislation, and she used a construction crew as an example to
ask about liability. REPRESENTATIVE NAVARRE explained they would
be eligible for workers compensation claims, because recreation is
provided as part of the job activity.
SENATOR KELLY clarified there was no objections from the labor
unions.
SENATOR RIEGER moved to adopt the new CS for SB 356, 8-LS1812\E.
Without objections, so ordered.
SENATOR RIEGER moved to pass CS FOR SENATE BILL NO. 356(L&C)
(WORKERS COMPENSATION FOR RECREATIONAL ACTIVITIES) from committee
with individual recommendations. Without objections, so ordered.
TAPE 94-18, SIDE A
Number 001
SENATOR KELLY introduced SB 185 (LIMITATIONS PERIOD FOR TAX
ASSESSMENTS) introduced by SENATORS TAYLOR and KERTTULA by request,
and invited former attorney general, CHARLIE COLE, to testify.
MR. COLE - "I am here today to speak as passionately and as
fervently as my sanguine personality permits in support of SB 185.
First, let me relate to you some of history behind this proposed
legislation. In March of 1993, last year, all of the lawyers in
the Department of Law, members of the Department of Revenue, and
expert witnesses retained in support of the prosecution of tax
assessment against major oil companies met in the Seattle area to
review the prosecution of the tax claims.
After we concluded two days of review, we began to evaluate the
various claims from the stand point of their settlement value. As
we did, and as the lawyers gave their views on the value of the
claims, they frequently commented, in their evaluation analysis,
about statute of limitations problems involved in the various tax
claims.
Number 056
As we concluded the discussion on that issue, I asked them as the
presiding person at this conference to furnish me with the amount
at risk, and the issues involving the statute of limitations. They
gave me a number which would knock your sox off, and I said, 'Wait
a minute. We need to discuss this further.' And I reasoned since
limitations had been imposed by legislative enactment, that perhaps
the problems inherent in this issue could be addressed or
ameliorated by a amendatory legislation. Legislation which was
designed to be retroactive as well as prospective, and so when we
concluded the conference, and returned to Juneau, I asked the
lawyers in the Department of Law to furnish me with an opinion as
to whether the statute of limitations involved in these issues
could be amended retroactively.
Around March 23, 1993, I received a very fine legal opinion which
concluded there were no constitutional problems, essentially,
involved in the enactment of statutes of limitations which could be
applied retroactively to clarify those statutes, because the
statutes certainly, at that juncture, had not been conceded by the
Department of law to bar these claims.
Number 103
The position of the lawyers in the Department of Law prosecuting
these claims, at the time, was there was litigation, heavy
litigation, if you will, then on going with respect to both the six
year collection statute and the three year assessment statute.
And, indeed a superior court judge in Anchorage had ruled the three
assessment statuted barred certain claims assessed against the
Exxon Corporation, and the case was being appealed by the State to
the Alaska Supreme Court. So much for the history.
After we returned and received the opinion on the constitutionality
on the retroactive legislation, we in the Department of Law, with
assistance of representatives from the Department of Revenue
drafted proposed amendatory legislation, introduced as SB 185,
which you have before you today.
Let me now say a word about the purpose of the statute of
limitations. I will keep it very brief. I am sure you know about
it, but just let me say this, I quote from a opinion of the Alaska
Supreme Court in which the court said that statutes of limitations
are intended to encourage prompt prosecution of claims, and thus
avoid injustices which may result from lost evidence, faded
memories, and disappearing witnesses. However, the court went on
to say this, 'Actions like the present one involving economic loss
are often faced largely on documentary evidence, not unaided
recollections, which quickly grow stale.'
Obviously, I think that is what we have here. These claims are
based largely on documentary evidence, and therefore, we are
dealing with the application of the statutes here, which are
primarily based upon documentary evidence. What two statutes do we
seek to amendment by SB 185?
There are two, as I say. One is AS 43.05.270 entitled Collection
after Assessment. Subsection (a) reads thus, 'When the assessment
of a tax imposed by this title has been made within the period of
limitations under AS 43.05.260, the tax may be collected by levy or
by a proceeding in court, but only is the levy is made or the
proceeding is begun: Subsection (a) within six years after the
assessment of the tax.' The key words there is 'the assessment of
the tax.'
Number 151
The assessment of the tax is governed by Section 43.05.260 entitled
LIMITATION ON ASSESSMENT. Subsection (a) reads thus,' except as
provided in Subsection (c) in AS 43.02.200 (b) the amount of a tax
imposed by this title must be assessed within three years after the
return was filed, whether or not a return was filed on or after the
date prescribed by law. If the tax is not assessed before the
expiration of the three year period, proceeding may not be
instituted in court for collection of the tax.' And, thus we have
two statutes which I refer to as the six year collection statute
and the three year assessment statute.
How do we wish to amend those two statutes. We do so by the
proposed SB 185. Let me say that this senate bill contains lengthy
recitals of findings of fact. I am not going to talk about those
today. They may or may not be the subject of some controversy, but
if you don't like the proposed findings, eliminate the ones you
don't like. If you don't like any of them, eliminate all of them,
but nevertheless, I urge you to enact this proposed statute in
substance.
And what do we propose to do by this statute? Well, what the
amendment does, in substance, is provides the Department of Revenue
may increase or decrease the amount of the tax due by issuing or
amending (a) an assessment at any time during the administrative
consideration of a taxpayer grievance on an assessment filed by the
taxpayer under AS 43.05.240 or another Subsection (b) dealing with
a claim for credit or refund of a tax filed by the taxpayer.
Subsection (a) only deals with the three year assessment statute,
and let me say what, in substance or in layman's language, it
proposes to do is to permit an assessment to be increased or
decreased if the taxpayer files an appeal, requests for an informal
conference, or requests for a formal hearing.
Number 201
If that process is activated at any time prior to the conclusion of
that process, either by way of an informal conference or by way of
a formal conference, then the assessment may be increased or
decreased. It's not locked in.
There is also the amendment to the proposed collection statute, the
six year collection statute under .270 (a) which provides the tax
may be collected by a levy if the levy is made within six years
after the latest of any of the following: (a) the assessment of the
tax, (b) the final administrative determination of the grievance,
if the taxpayer files a grievance, or (c) the final judicial
resolution of an appeal if the taxpayer appeals from the
administrative proceeding.
Paragraph (4) provides that these two subsections, which I have
just mentioned to you, become retroactive to January 1, 1976. The
issue is thus before you; should this proposed legislation be
enacted. Let me tell you why it should, if you will. First,
should the legislation be enacted prospectively? First, with the
respect to the six year collection statute. I as you, does it make
any sense to require a levy on an assessment before the amount owed
by virtue of the assessment has become final. I think no one would
argue that it makes sense to require, or the legislature to
require, the executive branch of government to make a levy while
the taxpayer is in the process of making an administrative appeal
from the assessment or a subsequent judicial appeal from the
administrative determination.
And, when I served as attorney general, I said this statute is no
problem if there is a $500 million assessment, the taxpayer has
filed a request for an informal conference and the six year statue
is about to run. Just get out a levy and go up and levy the
taxpayer's property at Prudhoe Bay and be done with it, but I
assure you as soon as you walked into their premises with that
levy, they would say, 'Wait a minute. We will waive the six year
statute,' because it doesn't make any sense to be levying upon an
assessment before the amount owing has been finally determined.
So I say, clearly and without reservations, you should adopt
perspectively the amendment to the six year collection statute.
Number 254
What about amendment the three year assessment statute, so as to
provide that a change may be made in the assessment during the
period of an administrative appeal. Is it unfair? Does it offend
your moral sense, that if a taxpayer appeals and says, 'I want an
adjustment to my tax assessment.' If in the course of that
proceeding, the evidence show that the assessment is too low and
should be increased, that's prohibited from increasing the
assessment. The only evidence which may be considered by the
hearing officer is evidence which decreases the taxes. What is so
unfair to the taxpayer by allowing the State to amendment its
assessment during the course of that proceeding.
If, as the supreme court has said, this is largely a matter for
issues to be determined by documentary evidence, then what is the
harm to the taxpayer. And, furthermore, the option to allow the
assessment to be increased lies with the taxpayer. The taxpayer
need not appeal the assessment, but the taxpayer should not be
given the advantage of only the taxpayer being able to reduce the
amount of the assessment.
And, furthermore, the taxpayer certainly, if it intends to
prosecute an appeal, is not prejudiced by stale evidence, by fading
memories, by disappearing witnesses. That is within the control of
the taxpayer. The taxpayer is certainly not prosecuting its appeal
in allowing its evidence, its documents to be lost or frittered
away. The taxpayer has the ability to preserve fading memories by
taking depositions; this is all under the control of the taxpayer.
So, certainly the taxpayer is not prejudiced. From the standpoint
of enactment of the amendments prospectively, to the three year
assessment statute, it seems clear that this statute should be
adopted.
Furthermore, let me say, this is the very revision which the State
of Texas has adopted in connection with its tax appeal provisions.
This is not some new striking revolutionary legislation which was
dreamed up by an aging attorney general. This is legislation which
is right within the State of Texas, where big oil is headquartered,
and they are not out urging the Texas legislature to amendment the
statute because its so unfair. Ask them if they have gone down to
the Texas legislature to say this is so morally offensive, so
destructive, of this industry that we must have this legislation
repealed. Of course not. They accept it.
Number 310
This has been the practice in courts of law in equity for years,
years, and years. And, in 1938, when the Federal Rules of Civil
Procedure were adopted, provision was made in Civil Rule 15(c) for
the adoption of the Doctrine of Relation Back, which says that if
one files an action before the statute of limitation runs, and then
in the course of that litigation, the statute of limitation runs,
that the claimant may amend the complaint and have the amended
claim relate back to the date the original action was filed. That
had been the practice in the courts of equity, in courts of law,
before 1938 when it became formalized in the Civil Rules, and the
underlying reason is very simple. The underlying reason is that
which I have related to you today, because it is not unfair for a
person against whom, in this case, a claim is made to have the
statute of limitations told - not run. And the reason the courts
may, and the scholars say, is because this person, who is being
sued is on notice that the claim is made against him or her.
The person, individual, or corporation is in a position to preserve
the evidence and not allow memories to fade and documents to go
away, but that is not the case which we have here. The case, which
we have here, is a case where it is the taxpayer, who controls that
process, not the person making the claim against him in control.
So therefore, in summary, prospectively this legislation should
clearly be adopted. It is fundamentally fair and good public
policy. After all, taxpayers, who are able to string out
prosecution of their claims, or the final determination of them, by
employing the finest lawyers and CPA'S in the world, and then say,
'Well, you know we fought the State, and the statute has run. Nice
going, guys! We don't have to pay.'
Now I tell you, the legislation in the State of Alaska should not
permit that, because it is fundamentally unfair that people are
able to do that to avoid payment of the just amount of money which
they owe.
Number 354
This is not seeking to change the rules for liability for taxes,
its only seeking to make clarifications of the existing statutes
governing the amendment of assessments. Now, let me say this,
should this legislation be adopted retroactively? Well, if you
follow the theory of Federal Civil Rule 15(c), if you follow the
Historic Practices of the Courts of Equity and the Courts of Law,
certainly there is nothing fundamentally unfair about making this
statute retroactively. These taxpayers, since they received their
assessments within the three period, have been on notice that these
claims were being made against them. You think for one moment that
they allowed their evidence, their documents to be lost, witnesses'
memories to fade. I can guarantee you in the files they have
statements three feet high of these witnesses. They know every
thing that happens, and the records would probably fill this room,
which they have appealed, and which they have kept. And, the
reason is, because they knew these claims were being made against
them and they needed to preserve that evidence, and that is why
they have done that.
So, there is nothing unfair about these statues being made
retroactively. Let them come before you today, as they will, and
say, 'We have been prejudiced. We will have been prejudiced if
this legislation is enacted. We will have lost our ability to
defend against an assessment, which has been increased, so as to
seek to compel us to pay the amount of tax we really owe.'
Finally, let me say this. These people will come before you today.
They oppose this legislation, and they will predict dire
consequences if this legislation is enacted, and they will tell you
that it is unfair, terribly unfair. But, let me tell you, ladies
and gentlemen, they oppose it, not because it offends their moral
sense, not because its underlying policies are not sound, but
because, and only because, it affects their bottom line.
Thank you." (End of formal presentation by former attorney general,
CHARLIE COLE.)
SENATOR KELLY said the administration took these same arguments in
front of the superior court and lost. Since it will be heard in
the supreme court, he asked MR. COLE why he felt the legislature
should interfere at this time with the legal processes going on.
MR. COLE - "For the reasons which I have related to you because the
Executive Branch of this government is under a statutory and
constitutional duty to collect taxes owed by these tax payers.
That they should not be able to avoid the payment of these
incredibly large amounts of money, because of infirm and unsound
limitations imposed by the legislature years ago, before almost 15
years of experience has shown they are unsound."
SENATOR KELLY explained the bill was introduced last year, towards
the end of the session there was a flurry of activity, and all of
a sudden the administration dropped the attempt to have the
legislation passed. He asked MR. COLE how and why that occurred.
Number 407
MR. COLE - "The reason, senator, was not because of a position
adopted by the Executive Branch of government. I could go a little
farther in answer to that question if you would insist, but I would
simply like to conclude my answer by saying, it was the sense that,
at that time, because of the lateness of the legislative hour, that
the bill was dead in the water." (SENATOR KELLY said it was
introduced on April 7th.)
SENATOR KELLY opened the meeting to questions and called on SENATOR
SALO.
MS. SALO questioned whether, if the bill is adopted, it would go
into the whole court challenge that currently exists on the same
point.
MR. COLE - "I think the answer to that is simply this, and I don't
mean to be flippant about it, but the answer is yes, because it
substantially will affect the bottom lines, and surely, those
affected adversely by the enactment of this legislation, would
challenge it in every legal forum, as well as political forum in
which they can. I don't begrudge them that. I would expect them
to do that, but it will be, of course."
SENATOR LINCOLN indicated she was not sure she understood MR.
COLE'S answer to the question asked about the loss in superior
court in 1992 on the time limitations. She asked what could be
done differently before the superior court.
MR. COLE - "You would substantially, in my view, be strengthening
the State of Alaska's hand to collect validly due and owing taxes,
except for the application of the existing statutes of limitations.
Does the legislature wish to strengthen the State of Alaska's hands
in the collection of these tax assessments by the enactment of this
proposed legislation, or doesn't it? If you don't want to
strengthen the state's hand in the collection of these taxes, you
should say, 'We decline to enact this legislation.' If you want to
strengthen the state's hand in the collection of these taxes, by
all means you should enact this legislation."
Number 453
SENATOR LINCOLN paraphrased his answer, commented the courts would
hear the arguments again in May, and asked whether he thought the
State would have much of a case. MR. COLE indicated he didn't say
that, but they both agreed the State would have a weaker hand
without the passage of SB 185.
MR. COLE explained with the passage of the bill, the State would
have a stronger hand. He said, "I support the State's position on
appeal. I think it is sound, but the Alaska Supreme Court decides
cases the way it sees them, and it may not see this case in the
same manner in which the State sees it. I'm saying fervently,
passionately believe the State's hand in the collection of these
taxes ought to be strengthened, and I say it not because of the
money, fundamentally, but because it is morally sound. These
taxpayers have not been prejudiced by the running of the statute of
limitations. If they were, one might say, 'Well, it is unfair.
They have been prejudiced. Let us not be unfair to them,' but
claim as they might that this is prejudicial to them, if I may
assure you. It has not been."
SENATOR KELLY questioned MR. COLE on his use of the word "State"
and asked if he didn't mean "Executive Branch," and might the
Supreme Court see it differently than he does.
MR. COLE - "Of course, but the caption in the complaint is State of f
Alaska Appellate, tax collector discharging its statutory and
constitutional duties to collect taxes, taxes which, but for the
running of the statute of limitations, by virtue of statutes
enacted by the legislature, would have to be paid."
SENATOR LINCOLN asked about the adoption of legislation or
regulations addressing the collection of taxes in the State of
Texas. She also asked the date and whether it was a long process.
MR. COLE - "I didn't study the legislative history but I have
copies of that legislation here and I can give them to you. It has
some historical notes. Some of it, I think was first enacted in
1956, then I saw amendments in 1968, probably amendments in 1981.
By writing the comptroller or the attorney general in Texas, I am
certain you could obtain legislative history."
SENATOR LINCOLN asked if it was very similar to the content of SB
185, and MR. COLE answered it was while looking for his copy.
SENATOR LINCOLN asked SENATOR KELLY to get copies for the
committee.
MR. COLE - "Let me say this, it is almost right on, although I did
notice in reading it, the legislation uses the term, administrative e
proceeding." SENATOR KELLY directed MR. FINK to get a copy of the
legislation. MR. COLE offered to provide copies.
SENATOR RIEGER questioned MR. COLE on his schedule, and MR. COLE
indicated he had planned to return to Fairbanks tonight, but he
assured SENATOR RIEGER he would stay until the end of the hearing.
Number 501
SENATOR SALO, in reference to his comments on moral dilemma faced
by the legislature regarding the change in the rules, asked MR.
COLE to expand a bit more on this point. She indicated the whole
area of collecting taxes is much more complex, fraught with more
disagreement than one would think in looking on the surface of it.
She wanted to know if the legislature would be unfairly changing
the rules, or were the rules ever clarified.
MR. COLE - "Let me say this. First, very clearly, the rules
determining tax liability, (1) the obligation to pay a given amount
of tax, are not being changed by this in statute, (2) only being
changed is the point in appeal process, or the chronological
history of the tax appeal, when an amended assessment may be made.
For example, let me put this case. Suppose an assessment is made
for $10 million. Taxpayer files a notice of request for informal
conference by way of a grievance, and discussions are held by this
informal conference, and the Alaska Supreme Court comes down with
a decision which changes the substantive rules for determining tax
liability, and that decision, if applied to the pending assessment,
would then permit an increase in the assessment.
Under the existing rules, if the three year statute had run, that
assessment could not be amended. Or suppose during a formal
conference, the three year assessment having run, and the taxpayer
in the formal hearing presents evidence by the taxpayer's own
documents that the assessment is too low, under the existing
statute of limitations. The taxpayer would say, 'I don't care what
our evidence shows, you can't increase the amount of that
assessment.' The only thing the hearing officer can do is decrease
the assessment. I say rhetorically, is that fair to the State of
Alaska to not be able to increase its assessment, the only thing
that can happen is the assessment be decreased? I mean, if the
determination is made that the amount of the assessment is not
accurate, and it inaccurately reflects the amount of tax the
taxpayer is owing, why is it so unfair about allowing the
Commissioner of Revenue to increase the amount of the assessment.
I say none. The taxpayer is not prejudiced. They have all of the
evidence there. They are the ones that presented it."
Number 544
SENATOR PEARCE suggested that if all of the cases were as straight
forward as the one MR. COLE put on the table, she doubted anyone at
the table would disagree with him. She didn't think any of the
committee members were qualified to figure out, or whom to ask,
about assessments that are still being gathered from decades ago.
She asked, in reference to the assessments being dealt with in the
bill, if it made sense to MR. COLE to go back and redo the
assessments. She also asked how the legislators can know whether
the State employees kept those assessments from being made in
timely manner, at which time she didn't think it was fair to go
back.
MR. COLE - "First, no one more fervently believes than I, this
process has got to be speeded up, to say the least, and further
more let me say this, sort of off the mark, 'I would urge the
legislature to form a committee and to look at this whole
underlying issue about how you value this oil.' That is where one
of the major problems comes from, but in direct response to your
question, assume, arguendo as they say, that the State has been
tardy. Just assume that, and they haven't gotten these assessments
done as promptly as they should have. I don't concede that, but
assume that for the purpose of my response to your question. How
has the taxpayer been prejudiced? You see, the taxpayer could have
said, 'I want a formal hearing. I want to get this over and behind
me.' The taxpayer didn't request formal hearing to get this done,
and wound up, (so they could present the payment). Maybe, I am not
saying they did, they thought it was better to string this stuff
out, because, given the interest rate which was accruing on these
assessments, that it was better to string them out and not pay the
tax, because the price of money they would have to use to pay the
assessment was more costly than the price of the State financing,
which they were receiving by not having to pay these taxes.
So what I am saying, in the final analysis, they have not been
prejudiced, they have been able to be on notice that these claims
are being made against them, that they can preserve their evidence,
they can preserve their witnesses, and their cases is ever bit as
sound today as it was on three years plus one day after the
assessment, after the return was filed. What I am saying is, it is
not unfair because they have not been prejudiced, although they
will say they have been prejudiced. They will tell you all sorts
of horror stories, but the fact of the matter is, and I will put
the focus on it with an electron microscope, you will find they
have not been prejudiced."
Number 587
SENATOR SALO explained MR. COLE had touched on one of key issues
being dealt with, and she asked why the settlements are taking so
long, and why all are contested. She questioned, if SB 185 was
enacted, if this would create less incentive to settle and how MR.
COLE saw this question.
MR. COLE - "Bunkum! Total bunkum! The statute of limitations has
nothing to do with that, and I've testified on this subject before.
I'll send you a transcript of my testimony as soon as I correct my
bad grammar. That's another subject, why these things are taking
so long, and what needs to be done. I would like to comment on it,
but I think I will reserve my comments if you don't mind."
SENATOR SALO asked for clarification on his position that the bill
does not adversely affect incentive to settle.
TAPE 94-18, SIDE B
Number 001
MR. COLE - "I think the enactment of this bill would increase the
industry's incentive to settle. I think so strongly because their
in a position, we can't avoid our liability by relying on the
statute of limitations anymore, so we should sit down and talk
turkey with the State. That is what I think, and frankly, I
thought that on April 7, 1993, but I just wasn't able to pull it
off. Sorry."
SENATOR SHARP explained, three or four years ago in Resources
Committee in the other body, there was an indication from Revenue
Commissioner at that time, that they really didn't know what the
tax should be. He quoted the commissioner as saying they doubled
or tripled it, and filed an assessment. SENATOR SHARP didn't think
there would be a rush to settle those kinds of situations without
some kind of ongoing negotiations, and he thought that might be
part of the problem, in some instances.
MR. COLE - "Just let me say this. Taking that testimony, and then
I read in the media that these taxes, which have been assessed, are
owed. Not simply assessed, but they are owed as if they were
adjudicated as a legally binding obligations, and then one seeks to
deal with these statute of limitations problems, which I have
talked about this afternoon. You get beaten up to a pulp in the
press, because one tries on behalf of this state, to address these
problems, and if you settle any of these claims that have been
doubled or tripled, if they have been, as you say, then people say,
'The attorney general is giving away the farm.' So, what do you
do?" (unintelligible phrase) (Thus ended the verbatim testimony
of former attorney general, CHARLIE COLE.)
SENATOR KELLY explained the committee was being asked to interpose
in a matter that's in the court on behalf of one litigant, but he
said there were two sides to the story, so there were a lot of
people who wanted to testify. He decided to move from one position
to the other in accepting testimony, and he began with LARRY
KIMBALL of the Cook Inlet Region, Inc. Next would be COMMISSIONER
DARREL REXWINKEL from the Department of Revenue.
Number 033
"I work for Cook Inlet Region, Inc. and LAWRENCE KIMBALL is my
name. CARL MARRS, Senior Vice-President and generally in charge of
oil and gas issues couldn't be here today. He has asked me to
present his testimony to you on this issue. Also, what we want to
do is convey mainly some concerns that we have. CIRI is a company
is Alaska owned, Alaska based, and whose shareholders depend upon
the long term health and stability of the Alaskan economy.
(At this point, MR. KIMBALL read a prepared statement by MR. MARRS,
which is entered in its entirety.)
"There are two major concerns if SB 185 becomes law, which I would
respectfully ask you to give careful consideration. The first is
that SB 185 likely would increase, rather than decrease, the
litigation, delay, and expense of tax collections. One purpose of
SB 185 appears to be to give the Department of Revenue more
negotiating leverage in tax collection cases, making it able to
increase the amount under negotiation by increasing the assessment.
However, when the rules are clear, fair, and consistently applied,
taxpayers will be more likely to voluntarily comply and pay tax
amounts that fairly approximate their liability. If, however, the
process is adversarial from the outset, and the department in
essence has the power to raise the stakes throughout, all parties
will revert to protecting their positions, making fair compromises
more difficult and costly to achieve.
A second concern is that it may discourage a small company (like
CIRI) from exercising its right to appeal a tax assessment that it
genuinely believes is erroneous. A taxpayer who desires to
challenge an assessment will fear - and understandably so - that a
new, higher assessment will be imposed during the appeals process
in order to discourage appeals by others. On the issue, like the
issue of the retroactive effect of the statute, I encourage the
legislature to obtain impartial constitutional advice.
This bill, which seems to be directed at the large oil companies,
adversely affects smaller Alaska companies as well. First and
foremost, our company depends, as does everyone in the state, on a
healthy, long-term Alaska economy. At CIRI, we believe the
continued strong presence of reinvestment by, and success of the
oil industry is crucial to everyone in our State. The Alaska Oil
& Gas Association has outlined the detrimental effects of SB 185 on
continued investment in Alaska, and I will not repeat - but do
endorse - the points they have made.
What you may not know is that CIRI, along with Doyan, Nana, and
other ANCSA Regional Corporations, own small minority interests in
certain Alaska producing oil fields. We have made these investments
in part because we believe in our State's future, and the money we
earn from them is distributed to our shareholders as well as other
ANCSA Corporations statewide through Section 7(i) requirements.
For the most part, revenue generated is pumped back into the Alaska
economy. CIRI, along with other small independent producers, pay
production taxes on its share of substances produced. Although we
depend entirely on the operators to set the value on which we pay
our taxes, we can be - and have been - audited and assessed.
It is not fair to us for assessment to reach back to 1976, for
assessments to drag on for years, and for the department to be able
to increase assessments even as they are properly being challenged.
Laws, when passed, must be universally and uniformly applied. The
adverse affects that may have on the large companies will be felt
by the smaller producers as well, like CIRI. And those effects
will be severe enough to ultimately discourage further investment
in our State's resources by smaller producers.
In short, CIRI is opposed to the passage of SB 185. We do believe
its procedural provisions introduce unfairness into the tax
collection process. The proposed provisions are likely to produce
an adverse effect on the economy that you do not desire. Instead,
it is sufficient to let the Department of Revenue use the extensive
audit and assessment powers it has now in a timely and consistent
fashion." (This ended the prepared statement read by MR. KIMBALL.)
Number 505
SENATOR KERTTULA asked MR. KIMBALL if he believed the taxpayers
should pay their taxes if they are due the State.
MR. KIMBALL answered that CIRI pays a fair amount of taxes.
SENATOR KERTTULA questioned MR. KIMBALL about doing business with
other major oil companies and its other departments.
MR. KIMBALL asked he was referring to other than oil and gas, and
SENATOR KERTTULA asked about drilling. MR. KIMBALL said CIRI has
one of its own wells in West Fork, a partnership with Doyan and
Nana Corporation, and owns a small percentage in an oil company in
Endicott.
SENATOR KERTTULA asked for the number of members in CIRI, and MR.
KIMBALL said there were 6700 shareholders - Alaskans.
SENATOR KERTTULA explained he always reasoned that if the State
collected full share of its revenue due it, those 6700 people would
receive more in allocations for schools and other programs than
they will directly from a very modest amount that CIRI may be
taxed. He expressed annoyance at testimony which conflicts with
the shareholders' needs.
SENATOR SALO asked MR. KIMBALL whose fault he thought it was that
assessments had dragged on for years. MR. KIMBALL thought it was
the State that has dragged the assessments out, but he didn't feel
qualified to say how much.
SENATOR KELLY asked MR. KIMBALL whose fault the superior court
decided it was, and MR. KIMBALL didn't know.
SENATOR KELLY asked MR. COLE what was said on that issue. MR. COLE
said he had a copy of the opinion.
SENATOR KELLY called for a short recess, after which the committee
listened to COMMISSIONER DARREL REXWINKEL from the Department of
Revenue, testify on SB 185.
Number 115
MR. REXWINKEL indicated his support of the testimony given by
former attorney general, CHARLIE COLE, and he introduced a letter
from BRUCE BOTELHO, the present attorney general, addressed to
SENATOR KELLY in regards to SB 185 on the statute of limitations
question.
MR. REXWINKEL explained that MR. BOTELHO'S letter provided some
excellent background information regarding the statute of
limitations issues. He pointed to the first paragraph which talks
about the need for clarification of the statutes as the issue in
this bill.
MR. REXWINKEL read the following paragraphs from the letter: "So we
need to be very clear that what is at stake here is not a dispute
about how much tax oil companies, or an particular oil company,
should pay. It is not a dispute about whether the Department of
Revenue's assessments reflect a correct or incorrect application of
the production tax or income tax laws and regulations. What is at
stake here is whether there can even be a determination of who is
right and who is wrong, and how much tax is actually owed under the
state's revenue laws. What the administration is saying is, let
the taxpayers exercise all of their rights to contest the
Department's assessments on the merits; ..."
At the bottom of the page, MR. REXWINKEL read: "Remember that the
only situations affected by the bill are those in which the
taxpayer has already been notified before the three-year deadline
that the Department of Revenue disputes the return, and where the
taxpayer is entitled to present new evidence and arguments
concerning its tax liability, and the Department is charged by
statute with determining the correct amount of tax due. The bill's
opponents would like this to be a one-way street: they are happy to
have the amount corrected downward, but they want the Department
barred from determining the correct amount of the tax if that
amount turns out to be higher than the initial assessment. That is
perfectly understandable, since it furthers each taxpayer's
individual financial interest, but one could not call it fair."
MR. REXWINKEL referenced page 5 of MR. BOTELHO'S letter to the
paragraph entitled VALUATION OF ANS IS DIFFICULT FOR MANY REASONS,
which he believed answered SENATOR SALO'S questions. On page 6, he
read the headlines and a bit more: "A. The sheer volume of crude
and number of dispositions make the audit process difficult and
time-consuming. I have given you the statistics for the first
decade of North Slope production, but I want to emphasize that when
this huge field began production, there was no model that the
Department could look at to figure out how the system worked. The
producers created and controlled the system, which was influenced
heavily by the world oil market and events in the Middle East, as
well by U.S. price controls."
MR. REXWINKEL next referred to B. on page 7 to talk about how the
ANS trade is unique; it is not like other domestic crude oil in the
way it is traded or transported. On page 8, item C., he read:
"Another key factor contributing to the difficulties in valuing ANS S
is the way that ANS is disposed of by the producers. Almost all
North Slope crude oil is disposed if in two ways: it is either
internally transferred and refined by the producer, or it is
exchanged for another crude or crudes which are refined by the
producer."
MR. REXWINKEL continued quoting from the letter on page 11, item D.
which stated: After the value of the crude is determined, the
Department has to audit the transportation cost of moving ANS from
the North Slope to the destination market." He also read the
Summary at the bottom: " This is all to say that the task of
determining a value for ANS is uniquely complex and difficult
undertaking. It took the state experts in the royalty litigation
years to compile the data and reach agreement with the producers
over the disposition of much of the ANS produced. It is not
surprising that the Department of Revenue also needed time to do
the job correctly." (Thus ended MR. REXWINKEL'S background
information, and he suggested everyone read the letter.)
MR. REXWINKEL said that copies of his testimony were distributed to
the members of the committee, parts of which he planned to review:
"This is a significant issue for the State of Alaska. Presently,
we have assessments outstanding plus penalties and interest
surrounding the three year and the six year statute of limitations
approaching $3 billion. Certain producers have challenged the
Departments ..."
SENATOR KELLY interrupted to ask if the $3 billion total, is being
discussed in the narrow definition in reference to the bill.
Number 159
MR. REXWINKEL explained there were two items being discussed in the
bill, one is the three year audit statute and the other is the six
year connection statute. He said the sum total of the two statutes
in amounts that could be under question, is approaching $3 billion.
SENATOR KELLY asked for an explanation of his answer, since he was
under the impression the committee was addressing about $600
million that might be at stake.
MR. REXWINKEL recalled back in 1992, an auditor in the Department
of Revenue tried to provide testimony to the court to approximately
that amount of money in tax assessments. He said some of the taxes
are very old, with accumulated interest in excess of that which was
assessed.
SENATOR KELLY opined the legislation would not only retroactively
tax them, but charge them interest on taxes they didn't know they
owed at the time. MR. REXWINKEL objected, saying it was not a
matter of retroactive taxation, but it is a matter of taxation, and
tax accumulates interest.
SENATOR KELLY asked how much more is in dispute, what is the total.
MR. REXWINKEL explained the total in taxes assessed, penalties and
accrued interest is approximately $5.5 billion. SENATOR KELLY
clarified that SB 185 affected $3.3 billion of the amount, and MR.
REXWINKEL said he was correct.
SENATOR LINCOLN asked if the amounts went back to 1976, and MR.
REXWINKEL said it would be going back to all of the uncollected
taxes going back that far.
SENATOR KELLY invited REPRESENTATIVE MIKE NAVARRE to the committee,
and MR. REXWINKEL continued his testimony.
Number 190
MR. REXWINKEL returned to the prepared statement to give some
additional history: "The charge to the Department of Revenue is set
out in AS 43.05.010. The Commissioner of Revenue must administer
the tax laws of the State of Alaska including the inspection of tax
returns, inspection of books and records, and the holding of
conferences and hearings to determine the correct amount of tax due
and to resolve disputes. The Attorney General and the Department
of Law are significantly involved in these processes.
The Petroleum Division was created in 1975, prior to TAPS coming on
line in June of 1976.
In 1976 the oil and gas separate accounting income tax was passed
by the legislature. The Department of Revenue adopted regulations
to implement this act in February 1979.
The separate accounting income tax was subsequently challenged as
unconstitutional by the producing companies, but the state was
ultimately upheld in the United States Supreme Court, even though
the state had by then repealed the law. (separate accounting tax)
Through December 1977, the Petroleum Revenue Division had only one
Revenue Field Auditor. Tax returns were filed with the Department
of Natural Resources.
By December 1979 the staff was increased to seven positions
including five field auditors. Between 1983 and 1985 the staff
grew to eight field auditors. In July of 1985 the Petroleum
Revenue Division was combined with the Audit Division. Prudhoe Bay
oil producers had seen nine years worth of production flow down
TAPS and filed in excess of 200 monthly production tax returns each
year. For some years the number of returns is double or triple
that because of the filing of one or more amended returns for a
month or group of months.
In December 1986, the Oil & Gas Audit Division was formed and the
staff was increased to fifteen revenue auditors, two audit
supervisors, two tax examiners and three appeals officers.
Currently we have sixteen revenue auditors, one audit supervisor,
four appeals officers, one appeals supervisor, six members of the
economic research staff, and two in the property tax section, one
assistant to the director and four support and return processing
positions.
The procedures prescribed for tax dispute resolution are set out in
the Alaska Statutes and the Alaska Administrative Code (the
Regulations). The "normal" procedure consists of an audit of a
taxpayer's returns performed by the Department of Revenue, the
issuance of an assessment of tax due with a notice of deficiency.
The assessment is issued within the 3-year statute of limitations
(or the agreed-up extension period). The problem occurs when the
department sees a need to make changes as the result of information
developed during the administrative appeal. If a taxpayer disagrees
with assessment a Request for Appeal must be filed by the taxpayer
within 60 days of the receipt of the notice of assessment. The
taxpayer may request an appeal at the informal conference level to
provide additional facts, documents or relevant information. Or
the taxpayer may request a formal hearing, conducted in a more
formal legal setting, with the ground work being laid for
subsequent litigation if the case remains unresolved or if further
appeals to the Alaska Superior Court or Alaska Supreme Court.
Number 230
The assessments dealing with both production tax and separate
accounting income tax are highly complicated and deal with highly
confidential areas of valuation of the oil and the cost of
transporting the oil since Alaska's taxes are based on the value,
net of transportation costs. Any impact upon these two factors
means millions of dollars in tax.
To determine the value of oil for tax purposes, essentially every
barrel is traced during audit to the sales delivery point, normally
the west or gulf coasts of the United States. Every barrel is also
traced to a sales contract, which is examined to determine the
actual consideration received by the taxpayer and then that is
compared to what was reported on the tax returns and to the
Department's own determination of the prevailing value of the oil
in the market where sold.
This process requires voluminous data be obtained from the
producing companies and careful evaluation of that data to
determine the consideration received by the producer, since much of
the oil is traded in-kind or refined by the producer, and not sold
outright for cash. It takes professional judgement along with
sophisticated factual data analysis to determine the value of the
oil for tax purposes.
Alaska's oil and gas does not get to market until weeks after it is
produced. the production, transportation and marketing activity
encompasses many diverse and often geographically distant
affiliates of large integrated oil companies. The compilation of
information for just filing the tax returns involves many
individuals and volumes of information. Amended returns are often
filed many months and sometimes years after the original return is
filed is the rule.
Any resistance or hesitation by the taxpayer companies to provide
this data slows the audit process to the extent to where an auditor
frequently must request a written consent of the taxpayer to extend
the period of audit under the three-year statute of limitations.
Taxpayers seem to be increasingly hesitant to grant such waivers.
The auditor may be forced to issue an assessment based on
insufficient information, if factual data is not forthcoming during
audit field work. The taxpayers then try to settle during the
administrative appeals process on some other basis, in hopes of
avoiding the production invoices, contracts and records concerning
the real consideration received for their oil.
One begins to grasp an understanding of the tremendous workload in
terms of work-hours, document production and computer data
processing required. We are dealing with some of the largest and
most sophisticated corporations in the world. A dispute over taxes
quickly evolves into a major legal contest of skilled attorneys and
credentialed expert witnesses pitted against the State. In a
recent formal hearing completed by the Department, a single
taxpayer produced over 120 boxes of documents. The administrative
hearing record consisted of about 40,000 pages.
Given the large volume of oil, the large number of contracts and
the relatively few auditors, it is a high-stakes game the taxpayers
play well and to their advantage. Taxpayers have attempted to use
the three-year audit limitation and a six-year collection
limitation period to prevent the Department from determining or
collecting the correct tax due based on factual information
discovered years after the fact.
Even the utilization of the North Slope Oil Field and the multiple-
ownership of TAPS have, despite their efficiencies, created
disputes among and between the producers themselves that have taken
many years to resolve.
Section 2 of proposed SB 185 ensures that the Department may
utilize information discovered during the course of an appeal in
determining the correct amount of tax due. This is only common
sense.
At the present time, the Division's normal audit practice is to
audit three or four years of monthly oil and gas production tax
returns in a single audit program. We are presently auditing the
1987 - 91 period of the major producers.
Number 284
While some taxpayers may try to provide us information to complete
the audit assessments, we frequently find that the information is
incomplete and additional information is necessary to accurately
analyze and develop audit issues. If the deadline expires prior to
receipt of the necessary data, assessment is based on incomplete
information.
If SB 185 is not passed - audits may not be completed and disputes
from assessments will occur, resulting in re-auditing during the
administrative appeals process. Too much tax revenue is at risk to
allow oil and gas producers to go un-audited because of unrealistic
statute of limitations restrictions.
In the face of the reduced oil prices on the world market and the
inevitable decline in North Slope oil production, every dollar of
tax assessed in our audits, and ultimately collected under Alaska's
tax laws, become more important to the state Treasury.
It is not uncommon to receive comments about how old some of the
oil and gas tax cases are. Let me point out that the recent Aramco
case decided by the U.S. Tax Court last December involved complex
issues similar to those arising under Alaska's production tax and
dealt with the 1979 - 82 tax years. That case, and the Amerada
Hess Royalty litigation, both illustrate the amount of time and
work involved in resolving these complex matters. These cases
should dispel any thought that these lingering disputes are due to
lack of activity on the part of the State of Alaska, which has been
diligent in pursuing resolution of these matters.
The division presently has five assessments of AS 43.50 oil and gas
production tax against three producers whose assessments were
corrected based on information disclosed during the informal
conference or formal hearing stage.
The taxpayers potentially have much to gain by defeating SB 185.
Much of the Department's ability to issue these assessments has
arisen directly from data obtained through litigation against the
taxpayers in the Amerada Hess Royalty Case. One producer even
developed a method of concealing the actual disposition of barrels
of ANS exchange from the consideration received, thereby burying
the audit trail.
It has only been through legal discovery in the Amerada Hess
Royalty case and the great volume of documents produced to the
State's attorneys, that auditors were finally able to obtain
disposition of ANS crude. That case took almost 10 years to
prepare and many tens of millions of dollars in legal and
consulting fees!
Without the data obtained in the Royalty litigation, much of the
information used by our auditors would still be unavailable through
the peeling of the onion approach that producer company tax
personnel put in front of the State of Alaska auditors.
If the State was unable to toll the three-year and the six-year
statute of limitations during the administrative appeals process,
the State would be barred from determining the correct tax due
under Alaska law. It is that amount to which the State is legally
entitled to, and only that amount, that the Department of Revenue
is trying to assess and collect.
One need only to look at the recent history of settlement revenues
received to grasp the magnitude of impact upon the State Treasury
these cases have.
In summary, because of the large amount of public revenues at risk
and the Division's long-standing position and desire to assess and
collect the correct amounts of oil and gas production and "separate
accounting" taxes due the State of Alaska, I again, urge you to
pass Senate Bill 185 which confirms that the six-year collection
statute of limitations is tolled and allows for the issuance of
amended assessments during the administrative appeals process."
(Thus concluded the formal testimony from COMMISSIONER REXWINKEL.)
SENATOR KELLY opened the meeting to questions, and invited
REPRESENTATIVE NAVARRE to speak.
REPRESENTATIVE NAVARRE asked, with all of the information from
Amerada Hess and other litigation up to this point, how long would
it take for an accurate assessment process to be initiated today.
MR. REXWINKEL said it would depend, and since they were more
current with the 1987 to 1991 time frame, and he explained the
advantage of doing multiple years because of the audit efficiency.
He also explained many of the taxpayers liked to maintain a certain
amount of confidentiality over their sales agreements and other
contracts for a period of some time.
MR. REXWINKEL explained the production tax is based on the value
that could have been received, and they have to look at the
prevailing value. He also explained the difficulty because a lot
of the oil is either refined or exchanged, including multiple
exchanges. These chain of exchanges require complex procedures. If
they were all straight cash sales with no other consideration
involved the process would be easier. MR. REXWINKEL claimed they
had the barrel tracking down very well, also.
Number 340
MR. NAVARRE questioned the barrel tracking procedures and asked if
all of the procedures had been made easier since the litigation
such as the Amerada Hess case.
MR. REXWINKEL explained the Amerada Hess process provided his
department with the data base of all the past years and was a
tremendous help with respect to determining the amount of
production and the barrel tracking in the years up to Amerada Hess.
He said, subsequent to that, it gave us a good base of knowledge,
plus the barrel tracking process because easier with better
records.
MR. NAVARRE questioned whether the bulk of the taxes, interest, and
penalties that are due the state for prior years, were from years
when arguably the state did not have the information necessary to
make an accurate assessment.
MR. REXWINKEL said he was somewhat correct. He explained it had
taken an extended period of time to receive all of the factual
information upon which to base a proper assessment of taxes.
SENATOR SALO asked, in relation to the history on the number of
employees back in the late 1970's, if the information about the
value of oil was determined largely on information from the
taxpayers themselves. She wanted to know how that had changed.
MR. REXWINKEL explained the factual information, such as contracts
and the barrel tracking, initially came about during the Amerada
Hess litigation. Since that time, he further explained, we have
been in a much better position, also, due to the increased staff,
within what is now the Oil & Gas Audit Division. He gave credit
also to an economist division headed up by DR. CHARLES LOGSDON, the
Chief Petroleum Economist, which helps in some of the value
considerations in other areas of the economy with prevailing value
issue.
Next, SENATOR KELLY introduced JOE HOUSEHOLDER, the General Tax
Counsel for Unocal Corporation, to testify on behalf of the Alaska
Oil and Gas Association (AOGA), and as chairman of the AOGA Tax
Committee. He distributed copies of his prepared statement.
Number 380
MR. HOUSEHOLDER explained, before he read his prepared statement,
he wanted to make a few points about CHARLIE COLE'S impassioned
plea, on behalf of the bill: "First, he indicated several times
that we were in control of whether or not to appeal, but the
department controls the timetable of these appeals, both informal
and formal. Thus, we are damaged by evidence or people lost by
delay. Also, the department raises new issues, so how could be
have three feet of depositions on issues that are raised after
people die or are otherwise incapacitated. Realistically, they are
in control, they, the audits, and the appeals on their schedule.
When they are done, tho, they should be done. There must be an
end.
Second, the State of Texas provision is not the same. It is
complex and although I have not studied it in detail, it appears to
me from reading it, that it only allows changes during the appeals
process during an open statute of limitations period, and then only
up to the amount of the original assessment.
Third, why is it that only we care about the money, and not the
morality, but he cares about the morality, and not the money. I
don't think the two can be divorced.
Fourth, he says they are not changing the substantive tax law, only
the procedural rules, but this is semantics. It is not a direct
change, but indirectly it allows him to continue to raise new
issues, and change their interpretation of old issues for an
indefinite period of time.
Fifth, MR. COLE said we have not or will not be prejudiced, that we
are voluntarily extending to save money on interest or in hopes of
reducing the tax. That is just bunko, but if we did not agree to
extend the statute, we were constantly threatened with larger
assessments, and those companies that challenged them on it, called
their bluff, they lost, were assessed large penalties, sometimes
multiples of the tax.
Finally, and most importantly, he said it will be an incentive for
the industry to settle if you approve this bill, but should you
decide to approve this bill, and we certainly urge you not to, it
will definitely be an incentive for the Department of Revenue never
to settle. They will drag these appeals out forever, and continue
amending assessments ad nauseam. Now I will read our prepared
remarks."
Number 451
REPRESENTATIVE NAVARRE quoted MR. HOUSEHOLDER as saying those would
not agree to extending were punitively assessed.
MR. HOUSEHOLDER - "I believe that's the case. We, at Unocal,
always extended, but whenever we were in a position where we
thought we probably shouldn't, we were told we were just going to
get a larger assessment, because we got to protect our interests.
And, we do know that other people have told us they were assessed
large penalties in these situations."
REPRESENTATIVE NAVARRE asked if had looked at it from the
department's perspective, under the mandate they have in statutes,
and whether it is in the State's best interest if they don't have
adequate information to make an assessment. Shouldn't they assess
a larger number and then go back.
MR. HOUSEHOLDER - "I guess I would ask a question in response to
that. How long do they need? Some of these are ten years passed
the tax period. I think they have had adequate time. Its just
that they continue to invent new issues and look for new things,
and how long are we going to let it go on?"
SENATOR KELLY asked to listen to MR. HOUSEHOLDER give his prepared
testimony before more questions.
MR. HOUSEHOLDER - "Thank you for this opportunity too testify on
Senate Bill 185.
AOGA is a trade association whose member companies account for the
majority of oil and gas exploration, production, transportation and
marketing activities in Alaska. AOGA absolutely opposes SB 185.
This bill represents unwise and unfair tax policy. It would set
terrible precedent. It will provoke more litigation that it would
resolve. Even the findings it purports to make as justification
for what it does are incomplete, misleading or simply untrue. Let
me examine what SB 185 would do, in order to explain our reasons
for such strong opposition.
SB 185 proposes to amend the statutes of limitations for taxes.
There are two of these statutes. One gives the Department of
Revenue three years from the time a tax return is filed, in which
to audit the return and issue an assessment for additional tax.
The other gives the Department six years from the time it issues a
tax assessment, in which to go start legal proceedings to collect
the tax claimed in the assessment. There is no need for this
legislation. Under current law each of these statutes provides
that the time period may be extended by mutual agreement between
the Department and the taxpayer, and there is no limit to the
number of times an extension may be further extended by mutual
agreement. Since the very beginning of oil and gas production in
Alaska, it has been the general practice of oil and gas taxpayers
to agree to extensions whenever the Department asked for them.
This is common practice both within and outside Alaska. It is also
fairly well settled law, at least in the U.S., that once a statute
of limitations period has expired, it cannot be resurrected,
despite the willingness of the parties. That brings me to an
interesting point with respect to the subject matter here. While
I am not personally knowledgeable about the tax affairs of other
AOGA members, I am familiar with those of Unocal. Unocal has
typically received its assessments on, or after, the very last day
of the extended limitations period - which, by the way, may have
been 10 years after the taxable period. How then, could our appeal
of the assessment be found to extend the limitations period which
has already expired by the time we file the appeal? I'll tell you,
the fact is that the Department is asking you to enact legislation
which will likely be unsuccessful in the Courts. It is only the
retroactivity they can be interested in because they have not
asserted a problem with receiving waivers under current law.
Speaking of the courts, let me tell you what they say:
'The purpose of statutes of limitations is to encourage promptness
in the prosecution of actions and thus avoid the injustice which
may result from the prosecution of state claims. Statutes of
limitations attempt to protect against the difficulties caused by
lost evidence, fading memories and disappearing witnesses.'
These aren't my words, nor the words of anyone else with AOGA.
They are the words of the Alaska Supreme Court in Byrne v. Ogle,
reported at page 718 in Volume 488 of the Second Series of the
Pacific Reporter.
Think about that for a minute. The purpose is 'to encourage
promptness ... and thus avoid the injustice which may result from
the prosecution of state claims.' How might this 'injustice'
occur? Because of 'the difficulties caused by lost evidence, faded
memories and disappearing witnesses.' In other words, as time
passes it gets harder and harder to prove what exactly you did and
why you did it.
Number 500
Statutes of limitations are suppose to let you defend yourself
while you still have the evidence available to do it. AOGA members
are facing tax claims based on events 15 years or more in the past.
Not only do memories fade and witnesses disappear during such a
long time, but people may die and documents may be difficult to
locate. Even corporate taxpayers may merge and disappear
altogether during such a long time.
Now, what does SB 185 propose to do? Well, Section 2 would amend
the three-year statute of limitations to allow the Department of
Revenue to 'increase or decrease the amount of tax due by issuing
or amending an assessment at any time during the administrative
consideration of a taxpayer grievance on an assessment[.]' In
other words, instead of requiring the Department to do its audits
and make its claims while the evidence is still fresh, it will
allow the tax audits to drag on while the Department and its
outside consultants try to invent new ways of viewing the past.
All it will need to do is issue an assessment for substantial sums
that is full of mistakes or questionable claims, and that will
force the taxpayer to appeal. Under the proposed changes, there is
no restraint on how long the appeal process can go on and the
Department could make assessments indefinitely so long as it held
the appeal within the Department's procedures.
But SB 185 goes beyond being an open invitation for the Department
of Revenue to ignore the quest for prompt and reasonable audits.
So far only a handful of tax appeals have made it into court and
become public. But it is clear from those that have become public,
that the Department at various times in the past has told taxpayers
what the tax rules mean and how they should comply with the law.
Sometimes this advice came from the Department's auditors during an
audit of the taxpayer. Sometimes it came from the Commissioner of
Revenue. sometimes it came in the form of instructions on the tax
return forms. One would expect taxpayers to follow such advice
when it is given. Indeed, if they don't follow it and don't have
a reasonable cause for not following it, they can be subject under
AS 43.05.220 to negligence and failure-to-pay penalties of up to
30% of the amount of their underpayment.
But as the years passed and the tax appeals dragged on and on,
something bad started to happen. The Department began getting new
advice from outside consultants and lawyers about how much more
taxes could have been due if the Department hadn't given it
original advice. Some of its own auditors also found ways to claim
additional taxes if only the Department hadn't given that
inconsistent earlier advice. And so the Department began issuing
new assessments which repudiated its earlier positions and its
advice that taxpayers had relied on. Instead, the new assessments
asserted different positions under strained and unexpected re-
interpretations of the tax statutes and regulations.
SB 185 would ratify this process of retroactive revisionism. As
long as the Department still has a taxpayer's appeal pending before
it, its audit and litigation teams would be free to develop radical
new theories for yet more taxes and, under SB 185, they could amend
the assessment to incorporate those new positions.
How does this square with the idea of 'avoiding justice' due to
'difficulties caused by lost evidence, faded memories and
disappearing witnesses' which the Alaska Supreme Court said was the
purpose of s statute of limitations? Well, of course, that's a
rhetorical question because it's obvious SB 185 doesn't square with
that idea at all. Until a tax appeal finally makes it out of the
Department and into court - which could be 10, 15 or perhaps even
20 years or more after the fact - there would effectively be no
three-year statute of limitations at all under Section 2 of SB 185
and no limit on the exposure that a taxpayer may face simply for
having appealed an assessment containing mistakes.
Section 3 of SB 185 effectively removes the six-year statute of
limitations as well while a tax appeal is pending before the
Department. That section proposes to amend the six-year statute so
that the six-years don't begin to run until 'the final ....
TAPE 94-19, SIDE A
Number 001
(MR. HOUSEHOLDER continues to read his prepared statement.)
... administrative determination of the grievance[.]' In other
words, the six years don't start until the Department finally
issues its final decision in the tax appeal and the matter moves on
to court.
So between Sections 2 and 3 of the bill, there would effectively be
no statute of limitations at all until the Department has finished
its consideration of the tax appeal.
We in AOGA do not believe this is a sound policy for Alaska. This
is not an easy time for the Alaskan oil industry. Prudhoe Bay
production has been in decline for five years and is down by 25%
despite billions of dollars of continued capital investment during
the same period. This year and in the coming years other fields on
the North Slope will begin their own production declines. Cook
Inlet production has been in decline for over 20 years. On top of
this, we have been hit by low oil prices, which makes it that much
tougher to continue the investments that need to be made to slow
down the rate of decline.
Each company up here is competing for money against other parts of
the same company. None of us can afford to make all of the good
investments that we have opportunities for. So we only choose the
best investments. Not just the best economically - often the
opportunities elsewhere are economically comparable to the ones
here. In such cases, if we are to make the Alaskan investment
instead of the other one, there has to be something else that gives
Alaska a competitive edge.
SB 185 would take away some of Alaska's current edge in these
decisions because it would increase the uncertainty about what our
tax obligations are. We can pay today exactly what the Department
of Revenue tells us to pay, but we would have no assurance that the
Department will not change its position in the future and try to
apply the new position retroactively back to today through the
audit and appeals process.
Both ARCO and BP have said that half the North Slope production
they expect to see in the year 2000 - just six years from now -
could come from investments that have not yet been made. I submit
that if Alaska de-stabilized its tax system and scares off those
investments, the cost to the State in terms of lost taxes and
royalties from the production will exceed any extra taxes that
Alaska might gain by adopting SB 185 and trying to administer its
taxes by hindsight.
So far I've been talking about the problems with Sections 2 and 3
of SB 185. Before I move on to other parts of the bill, let me
make two final points.
Number 051
One, why is Section 3 necessary? The Department of Revenue
controls the pace of the tax appeals process within the Department.
Under the Department's own regulations, 15 AAC 05.030(e)-(g), the
administration hearing officer sets the schedule. If a taxpayer
tries to drag the hearing out unduly, the hearing officer has the
authority to cut off 'irrelevant and unduly repetitious
evidence[.]' 15 AAC 05.030(h). So if the Department, not the
taxpayer, controls the schedule and pace of the tax appeal, why
can't the Department make sure it gets the hearing done within six
years? Why does it need SB 185 to keep the clock from starting for
the six years until the hearing is over and the Department issues
its formal decision? And if the Department does somehow find it
needs more than six years to get done with a tax appeal, why
doesn't it just ask taxpayers for an extension of the six-year
period?
The second point I'd like to make about Sections 2 and 3 is that
they are limited only to certain oil and gas taxes - namely, the
separate-accounting income tax that was repealed in 1981, and the
production tax. It's not a very friendly message that the State is
sending to the petroleum industry if it changes the rules of the
game just for us and no one else.
In fact, it's one more bit of Alaska's competitive edge that would
be thrown away. Why do this and invite at the same time litigation
over whether it's constitutional to discriminate this way against
one group of taxpayers.
Now I would like to discuss the retroactivity of SB 185, which is
in Section 4 of the bill. Not only are the proposed changes to the
statutes of limitation bad policy on a prospective basis, but
Section 4 would make them retroactive by more than 18 years to the
beginning of 1976.
There are three fundamental problems with this retroactivity. One,
there is already litigation pending over the three-year statute of
limitations. In fact, the Alaska Supreme Court is due to hear the
case on the three-year statute in May.
Adopting SB 185 retroactively would interfere in the orderly
judicial resolution of the litigation. The courts are, under our
constitutional system of government, the arbiter of what the
statutes mean. We don't think it is appropriate to change the
language of a statute retroactively and certainly not before the
courts have had the chance to rule on what it means.
The second fundamental problem is that such extreme retroactivity
simply goes too far. For some taxpayers, one or both of the
statutes of limitations has expired, and they now have certain
rights that have vested as a result. To take away those rights
retroactively and without compensation as SB 185 would do is, we
believe, unconstitutional.
Number 102
The third fundamental problem with retroactivity relates to wise
tax policy. Suppose the courts ultimately decide it is within
Alaska's constitutional powers to reach back more than 18 years and
change the rules of the game. Is this the stability that invites
people to invest in Alaska? No, it isn't. For if the State can do
it to oil companies, nothing will keep it from being able to de it
legally to miners, fishermen, timber interest, investors in a Gas
Pipeline, or the general public at large. Not only will SB 185
cast a pall over the oil industry here, but over all private
sectors of the state economy. Don't cripple Alaska's future through
a misguided attempt to change the past.
Before I close, I need to correct the record on a number of
statements in the findings and purposes of Section 1 that are
inaccurate, incomplete or simply untrue.
First, on lines 6 and 7 of page 1, the finding asserts that the
Department has taken a certain position, described in the next
three lines, in the context of the separate-accounting income tax
under former AS 43.21 and the production tax under AS 43.55. This
is incomplete. We believe the department also takes this position
on the income tax under AS 43.20, and may also take it for other
taxes that we are unfamiliar with. We fail to see why the findings
on this point, if true, should be limited to just the two oil and
gas taxes.
Second, on line 11 of page 1, the finding asserts that the
Department's interpretation of AS 43.05.260 is correct. This is
either false or misleading. The Superior Court has ruled that the
Department's interpretation of AS 43.05.260 is incorrect. While
the Department's appeal of that decision to the Alaska Supreme
Court is still pending, the current law if the case is that the
Department is wrong.
Third, on lines 12-14 of page 1, the finding asserts that this is
a clarification. In last year's hearing, ATTORNEY GENERAL COLE
testified that while working on tax claims and assessments, he
found 'corrections' that needed to be made to procedural tax
statutes, procedures and regulations to 'balance the scales' as he
put it. Corrections are not clarifications. The finding also
asserts that the Department's position is a 'long-standing
administrative interpretation' justifying the retroactivity of SB
185 to the date of enactment of AS 43.05.260, the three-year
statute of limitations.
It is simply not true that the Department's position is long-
standing. It apparently dates back no earlier than May 1989 and
certainly does not date back anywhere near to the 1976 enactment
date of the statute. Let me give you the facts to prove this.
Number 154
Under AS 43.21 taxpayers filed their tax returns no later than
April 15 of the year following their tax year, and the Department
issued tax assessments based on those returns no later than August
15, 1979 and each year thereafter while as AS 43.21 was in effect
all said that the assessed amount of tax 'may change as the result
of any audit findings within the three years of the date of this
notice of assessment.' The regulation also said, 'Returns and
assessments under this section are subject to amendment for three
years from the date of the original notice of assessment.' 15 AAC
21.700(e). In other words, the Department's own assessment notices
as well as its regulations said that the separate-accounting tax
assessment for the 1978 tax year, for example, was subject to
amendment until August 15, 1982 - the third anniversary of the
August 15, 1979 tax assessment for the 1978 tax year. This is not
consistent with the position that the Department may amend an
assessment 'at any time during the administrative consideration of
an appeal[.]' And so any long-standing position on the three-year
certainly doesn't relate back to the 1978-81 period when the
Department was actively administering the tax.
Further evidence that the Department's position is of a much more
recent date comes from a letter sent by the department to oil and
gas taxpayers seeking their comments to help the Department
formulate a position as to the proper interpretation of the three-
year statute. The letter, dated March 25, 1988, said, 'Your
participation is invited in order to assist the Commissioner in
focusing on the broader implications of various possible rulings on
the statute of limitations.'
There were 'various possible rulings' still open at that time, or
the Department would not have asked taxpayers for their input. And
if there were 'various' rulings still open, that implies that no
ruling or position had yet been formally taken.
Number 192
The Department explicitly confirmed that it had taken no formal
position on the three-year statute of limitations in 1987 and 2988
in the course of litigation by Standard Alaska Production Company.
In 1985 auditors in the Department had issued a new tax assessment
for separate accounting for the 1978 tax year, which was already
the subject of appeal by Standard for an earlier assessment for
that year. The new assessment was after the three-year period had
expired, but the auditor asserted that the three-year statute
didn't bar them from issuing the new assessment so long as the
appeal of the earlier one was still within the Department.
Standard sued in March 1987 for declaratory judgement, asking the
court to rule on the question whether the three-year statute barred
the new assessment or not. The Attorney General, acting on behalf
of the Department, argued to the courts that they should not hear
Standard's case before Standard had completed its appeal before the
department. The Alaska Supreme Court summarized these arguments as
follows:
The Department moved to dismiss Standard's complaint on the
ground that Standard 'had not yet exhausted its administrative
remedies.' It argued that no official Department view as to
Standard's limitations claims had yet been formulated ...
The case is Standard Alaska Production Co. v. Dept. of Revenue,
decided April 21, 1989 and reported in Volume 773 of the Second
Series of the Pacific Reporter, beginning at page 201. The
quotation appears on page 204. So unless the Department was
misrepresenting the situation to the courts in that case, it had
not yet formulated an official view about the three-year statute of
limitations as late as 1988 when the case was being briefed and
argued before the Alaska Supreme Court. In fact, if the Department
had formulated an official position while the Court's decision was
pending, it had a duty to disclose that material development to the
Court. So one may presume from the Department's silence that it
still did not have a formal position on the three-year statute of
limitations as late as April 21, 1989, when the Alaska Supreme
Court issued its decision in Standard.
The first time that the Department formally took a position was
indeed a few weeks after the Supreme Court decided the Standard
case. On May 26, 1989, the Department issued its formal hearing
decision in Exxon's appeal over separate-accounting for its 1978
tax year. In the Exxon decision, the Department formally took the e
position the three-year statute does not bar it from issuing a new
assessment for additional taxes while the tax period is under
appeal before the Department for an earlier assessment. Thus,
contrary to the 'findings' in SB 185, the Department did not adopt
its interpretation of the three-year statute until May 1989.
Perhaps a little less than five years is long enough to justify
going back over 13 years earlier to amend the statute on the basis
of the 'long standing' position.
Number 245
A fourth inaccuracy in the findings appears in lines 8-9 on page 2
of SB 185. It says the Department's audit has been so lengthily
because its ability to audit the separate-accounting and production
taxes 'throughout the 1970's and 1980's ... was constrained by its
audit resources[.]' In one sense that statement is true because
any limit on the resources available could theoretically operate as as
a constraint. But the statement is misleading because it implies
that the constraint was material and kept the Department from
acting faster. In fact, however, the public record shows that, in
every Session of the Legislature since North Slope production
began, the Department had received virtually every dollar they
asked for in the governor's budget proposals for oil and gas
audits. The Attorney General has informed the Legislature that the
State of Alaska has spent over 176 million in outside legal fees
and costs for litigation involving oil and gas royalty and tax
issues since 1977.
As finding (a)(7) on lines 2-3 on page 3 of the bill indicates, all
of the disputes in the production tax and by far the largest
disputes in separate-accounting are over the value at the point of
production of oil and gas, which was the key issue in the North
Slope royalty litigation as well. Surely the Department shared in
and benefitted from the fruits of this massive investment. Any
'constraint' on the Department therefore was at such a high level
that it is almost absurd to call it a constraint at all.
A fifth misleading 'finding' in SB 185 appears on lines 10-14 on
page 2. The finding says the length of these tax audits was caused
in part by 'taxpayers requested suspension of action on assessments
pending the outcome of a challenge to the constitutionality of the
separate accounting method[.]' It is true taxpayers asked for
suspension of action on their separate-accounting assessments, but
the fact is the Department did not stop auditing taxpayers nor did
it suspend action on the assessments.
Standard Alaska Production Company, for example, was issued
assessments in 1981, 1984 and 1985 for separate-accounting for the
1979 and 1980 tax years; and it received an assessment in 1986 for
production tax for the months from January 1979 through December
1982. Exxon also had similar experiences during this period. This
was all while the litigation was pending. Contrary to what the
findings says, the taxpayers' requests for action to be suspended
did not slow the Department down at all.
A sixth erroneous finding appears in lines 18-20 on page 2 of SB
185, which says that the proposed changes to the six-year statute
of limitations 'embodies the interpretation by and practice of the
Department of Revenue since the enactment of AS.05.270' in 1976.
The fact is the Department has never had any such interpretation or
practice, or it did, it never told any taxpayers about it. Unlike
the separate-accounting tax regulations, for example, - which
specifically say the assessment is open it audit adjustment for
three years from the date of the original assessment - there is not
now and has never been any regulation at all by the Department
about the fix-year statute. None for separate-accounting, none for
production tax, none for any other specific tax, and none for taxes
generally.
If you think about it for a moment, this lack of regulations isn't
surprising. As I explained before, the Department controls the
pace of tax appeals pending before it. So it is well within the
Department's own control to make sure it issues its formal
decisions in tax appeals within the six-month period. The six-year
period should never be a problem if the Department is doing its
job. Moreover, the statute says the six-year period can be
extended by agreement with the taxpayer. Throughout the 1980s
taxpayers in the oil and gas area regularly agreed to extend the
three-year statute of limitations when the Department asked them
to. There is no reason to think they wouldn't do the same with the
six year statute. But the Department never asked any of us to
extend the six-year statute.
Only after the Department found that the six year period had run
out for some taxpayers and it had forgotten or otherwise failed to
seek an extension of that period from them, did the Department
decide it needed to have an interpretation or practice regarding g
the six-year statute. This finding is a complete fabrication,
especially to the extent it purports to justify making the changes
to the six-year statute retroactive to 1976.
A seventh inaccurate finding appears in lines 21-30 on page 2 of
the bill. It asserts that 'often a tax levy cannot be made or a
proceeding in court cannot be initiated' because the appeal of a
tax assessment 'begins a process that often takes several years to
complete[.]' and because judicial resolution of the tax appeal
'often lasts several more years' after the Department's final
decision, and because starting a separate action in addition to the
tax appeal 'is impractical and inefficient use of ... resources[.]'
The administrative appeal of a tax assessment may take several
years but that shouldn't be six years.
Number 305
As I just said, the Department controls the schedule for tax
appeals before they go to court. Moreover, the fact that court
appeals of a tax assessment may last several more years is
irrelevant. When the tax appeal finally gets into court, that
makes the beginning of a court proceeding under which any
additional tax that is owed can be collected. The tax appeal
statute, AS 43.05.240(d) says, 'If after the appeal is heard it
appears that the tax was correct, the court shall confirm the tax.
In incorrect, the court shall determine the amount of tax ...' It
would be silly if the courts, having made these determinations,
said they could not force the taxpayer to pay the tax. We believe
the court proceeding to hear the taxpayer is indeed a proceeding in n
court under which the tax can be collected, which satisfies the
requirements of AS 43.05.270. In other words, if the tax appeal
makes it to court within six years of the assessment, the
requirements of AS 43.05.270 are satisfied and the Department will
be able to collect the correct amount of tax in the course of that
judicial appeal. No second court action is needed after the courts
decide the tax appeal, and so it is irrelevant how long the courts
take to hear that appeal. Thus, these factors cited in the finding
do not support the conclusion that a court proceeding cannot be
initiated within the six-year limitations period.
An eighth erroneous statement appears in lines 9-10 on page 3 in
the purposes subsection of Section 1 of the bill. It says the
purpose of this legislation is 'to validate and affirm the long-
standing administrative interpretation and practices of the
Department of Revenue[.]' As I have shown earlier, the Department
did not adopt its present view of the three-year statute until May
26, 1989 when it issued its decision in Exxon's separate-accounting
appeal. And in fact as late as April 21, 1989 the Department, by
its silence to the Alaska Supreme Court in the Standard case,
implicitly denying that it had yet adopted an official view on this
statute. And as I have also shown, it never had any position on
the six-year statute until it found itself in trouble two or three
years ago with this statute. therefore, it is wrong to say that
the purpose of this legislation is to validate and affirm long-
standing positions when they are not long-standing at all.
Finally, I would draw your attention to one more inaccuracy in the
bill, in lines 11-14 on page 3 in the purposes subsection of
Section 1. The bill says one of its purposes is 'to resolve the
inconsistent decisions' in the Tesoro Case and the Exxon Case. The
Tesoro Case involves the three-year statute regarding tax
assessments. With different statutes, there is no way the case
could be inconsistent. And even if they were inconsistent, neither er
judge's decision sets any precedent that binds any other judge. In
civil cases only the Alaska Supreme Court sets binding precedent.
So in due course the Alaska Supreme Court would reconcile whatever
the inconsistency might have been. But, as it turns out, the State
has settled the Tesoro Case, so there is nothing from that case
that could cause an inconsistency with the Exxon Case.
I have gone on at some length rebutting the inaccurate, misleading
or even false statements in the findings and purposes section of
the bill because it is a very serious thing to play fast and loose
with the truth as part of the justification for legislation. As
recited in the findings and purposes, the major justifications for
this legislation, and particularly its retroactivity, turn out to
be untrue.
Number 352
I believe the sponsors of this legislation are well-meaning and
justifiably interested and concerned about the lengthy tax appeals
that are going on. Unfortunately, their good intentions and
sincere desire to improve the situation have not been well served
by the parties who asked them to introduce this bill. The sponsors
relied on those other parties to prepare accurate justifications
for the bill. those other parties did not do so. Instead, in
drafting the findings and purposes of this bill, those parties
indulged in the hyperbole and exaggeration that are common in legal
advocacy before a court or administrative tribunal. Legislation is
the solemn exercise of sovereign power by the People's elected
representatives. It is not the place for exaggeration and
hyperbole. SB185 is a piece of bad legislation, but the findings
and purposes that are offered to justify it are a travesty and an
abuse against this Legislature.
In summary, SB 185 represents bad tax policy. The proposed change
to the three-year statute of limitations would put taxpayers in
jeopardy of increased tax claims at any time while their appeals
are still before the Department. With the proposed change to the
six-year statute, there would be no time limits on the Department
for processing tax appeals, and the present system of litigating
tax disputes that are 10, 15 or more years old with be perpetuated.
But even more de-stabilizing, these changes would be made
retroactively by more than 18 years. And finally, SB 185 singles
out just one industry - oil and gas - for these changes. All this
sends a very hostile message about Alaska not only to the
managements of the companies who are already here, but also to
those who might be thinking about investing in Alaska.
On behalf of AOGA and its Tax Committee, I urge you to reject SB
185. Thank you." (This ended MR. HOUSEHOLDER'S formal testimony.)
SENATOR KELLY asked for any questions of MR. HOUSEHOLDER.
REPRESENTATIVE NAVARRE - "In part of your testimony, you say the
Department constantly goes back and gets new advice from outside
counsels and lawyers in order to assess more taxes. Does the
industry ever use attorneys or outside counsel, or otherwise, to
try to reduce their tax burden?"
MR. HOUSEHOLDER - "They certainly use attorneys and accountants to
protest the assessments they get, and they certainly use attorneys
and accountants in all of their tax matters, that is not in
dispute."
REPRESENTATIVE NAVARRE - "I am trying to determine what is
legitimately owed to the State. I don't want to change the taxes
or send the wrong message, but tax stability has been an issue ever
since I have been in the legislature. Under the tax structure and
the constitution, and our responsibility as legislators, every
single legislature has the responsibility to determine what is in
the best interest in the State. The members of the legislature are
changing and so will the way they look at and the way they
interpret what is in the best interest of the State. That's our
responsibility. To assume that we would not change anything simply
for stability would be to say we could never change license fees,
or anything, because some previous legislature determined the best
way to do it.
I don't want to change the tax system just to ding taxpayers, I
want to do what is in the best interest of the State, and I think
that is what the interest of the committee and the legislature is,
in order to find out what is in the best interest of people of the e
State, and what is legitimately owing, and how we get to some way
to determine based on our statutes and what is owed to the State.
What we should be legitimately getting, and what we shouldn't, and
if the statute of limitations question is being used ... as a way
of trying to get out of a legitimate obligation to the State, then
we ought to go back and try to do everything we can to shore up the
State's case. If it is just being used in order to go back and try
to ding the companies for something they didn't owe us, it is not
legitimate. That's what we are trying to sort out."
MR. HOUSEHOLDER - "I believe prior legislatures passed the
provisions that we are talking about here, in the best interest of
the State, that you have procedural rules that the administrations
are to follow, so that you have a sound tax system that will allow
companies to come in and invest in Alaska, which they did. Now the
administration is asking you to go back and change what that former
legislature thought was a good rule, in order to correct for, in
one case, mistakes they've by letting the six-year period lapse -
when they could have just asked us for a waiver - and they didn't.
They always asked us for waivers for the three-year statutes, so
the fact that they didn't ask on the six-year six is, in effect,
just a mistake. On the three year assessments, there should be a
finality to taxes, and in some cases, some taxpayers are done. In
Unocal's case, we've settled some things or had other years closed
out. Other taxpayers might be open for that same period, and it
tomorrow, people in Darrel's organization find some new issues,
those people that are still in appeals, will have those new issues
raised, but those won't come against Unocal. And, that's just the
way the tax administration works in the whole world. It works by
statutes of limitations, so that you are not open indefinitely.
If you were always open indefinitely, you could change the amount
of tax, or the rate of tax, or a substantive law provision, and
nobody would invest in Alaska."
Number 425
REPRESENTATIVE NAVARRE - "The legislature, probably at the time of
attempting to get more sophisticated about how we assessed taxes
and how we determined the value oil, ... we probably should have
suspended all of the statues of limitations at that time, until
litigation was finished, which helped us to learn how determine
that value. That is what would have been in the best interest of
the State, because absent that, how do we really determine what was
legitimately owed to the State."
MR. HOUSEHOLDER - "I don't know how long it takes. Unocal extended
its statute of limitations; we just got assessment last year for
1986, that's a long time ago. I don't think it takes that long to
figure it out."
SENATOR SALO - "You state in your testimony that the State is in
total control of the time line. Yet, when I asked that question
awhile ago, who shares the blame for things that drag on ... do you
really believe that the taxpayer shares none of the blame for these
cases dragging on?"
MR. HOUSEHOLDER - "No, I think that with hindsight, it might have
been better for some of the taxpayers just to refuse to extend, and
hope that the State would move these things along, but in effect,
every time somebody did that, they got hit with these penalties or
told they would be given a big assessment, and so they were afraid.
They let it drag along, because of this fear, but with hindsight,
maybe we shouldn't have done that."
SENATOR LINCOLN - "I have a number of questions, we will have our
attorney general's office respond to a number of questions you have
raised, either at some other meeting or in written response. You
have now, two or three times, alluded to the extended period of
time that could go on by mutual agreement, but is that more of a
gentleperson's agreement?"
MR. HOUSEHOLDER - "No, these were written contracts. Every six
months I would be asked by the auditor to extend the statute of
limitations under the three-year assessment."
SENATOR LINCOLN - "But, if one party does not agree to it?"
MR. HOUSEHOLDER - "They both have to agree."
SENATOR LINCOLN - "And also, you said a couple of times, that SB
185 would take away Alaska's current edge. What is our current
edge?"
Number 457
MR. HOUSEHOLDER - "Well, I think companies like to invest in
domestic opportunities, and Alaska has some good opportunities, but
companies such as Unocal ... see a lot of opportunities outside the
U.S. and other parts of the United States, in the Gulf of Mexico,
and we have to place our dollars where we think they will result in
the best return. And I can tell you that these big assessments we
got last year, did not help Alaska in its edge on those kind of
decisions."
SENATOR LINCOLN - "The other point I want to make ... when you say,
'It will allow the tax audits to drag on while the Department and
its outside consultants try to invent new ways of viewing the
past.' I can't imagine why, with the 60 legislative individuals
and the administration beating the doors, on earth a Department
would want to drag on cases in court when we, as 60 individuals
representing the people of the State, are saying we need to resolve
these issues. We need to resolve the litigations on the table now.
I can't believe that we intentionally would want to see cases drag
on, if it would not be to anyone's benefit."
MR. HOUSEHOLDER - "It might be to their benefit. They don't have
a job when they are done."
There being no further questions, SENATOR KELLY apologized to those
who were unable to testify: NORMA CALVERT of Marathon Oil, HUGH
MALONE and JOHN SACKETT representing themselves, JOHN RINGSTAD
representing BP, WALT FURNACE representing the Alliance, JOHN
BINKLEY representing himself, BECKY GAY representing the Resource
Development Council, and GEORGE FINDLEY representing ARCO.
SENATOR KELLY promised a further hearing as time permitted.
There being no further business to come before the committee, the
meeting was adjourned at 5:05 p.m. by SENATOR KELLY.
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