Legislature(1993 - 1994)
04/07/1994 01:50 PM Senate L&C
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE LABOR AND COMMERCE COMMITTEE
April 7, 1994
1:50 p.m.
MEMBERS PRESENT
Senator Tim Kelly, Chairman
Senator Steve Rieger, Vice-Chairman
Senator Bert Sharp
Senator Georgianna Lincoln
MEMBERS ABSENT
Senator Judy Salo
COMMITTEE CALENDAR
SENATE BILL NO. 305
"An Act relating to licensure of landscape architects."
SENATE BILL NO. 347
"An Act relating to limited liability companies; amending Alaska
Rules of Civil Procedure 20 and 24; 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 305 - See Labor & Commerce minutes dated 3/31/94.
SB 347 - See Labor & Commerce minutes dated 3/24/94
3/31/94.
SB 185 - See Judiciary minutes dated 4/20/93, 4/21/93
and 4/23/93. See Labor & Commerce minutes dated
3/22/94.
WITNESS REGISTER
Senator Suzanne Little
State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Outlined changes in CSSB 305(L&C)
George Davidson
16305 Lena Loop Road
Juneau, AK 99801
POSITION STATEMENT: Testified on CSSB 305(L&C)
Larry Meyers, Director
Division of Income & Excise Audit
Department of Revenue
P.O. Box 110420
Juneau, AK 99811-0420
POSITION STATEMENT: Department supports SB 347 in theory
Brian Durrell
6300 Andover
Anchorage, AK 99501
POSITION STATEMENT: Supports SB 347
John Hoffer
2550 Denali, Suite 604
Anchorage, AK 99503
POSITION STATEMENT: Supports SB 347
Bob Manley
324 East Cook
Anchorage, AK 99501
POSITION STATEMENT: Supports SB 347
Attorney General Bruce Botelho
Department of Law
P.O. Box 110300
Juneau, AK 99811-0300
POSITION STATEMENT: Offered information in support of
SB 185
Walt Furnace, General Manager
Alaska Support Industry Alliance
Anchorage, AK
POSITION STATEMENT: Opposes SB 185
Paul Wessells, Vice Chairman
Alaska Oil & Gas Association Tax Committee
121 W. Fireweed
Anchorage, AK 99503
POSITION STATEMENT: Opposes SB 185
Hugh Malone
Juneau, AK
POSITION STATEMENT: Supports SB 185
John Sackett
Juneau, AK
POSITION STATEMENT: Supports SB 185
George Findling
ARCO Alaska
Anchorage, AK
POSITION STATEMENT: Opposes SB 185
Norma Calvert
Marathon Oil Co.
Anchorage, AK
POSITION STATEMENT: Opposes SB 185
Val Molyneaux
VECO Inc.
813 W. Northern Lights Blvd.
Anchorage, AK
POSITION STATEMENT: Opposes SB 185
Beck Gay, Executive Director
Resource Development Council
121 W. Fireweed
Anchorage, AK 99503
POSITION STATEMENT: Opposes SB 185
John Ringstad
British Petroleum Exploration (Alaska) Inc.
900 E. Benson Blvd.
Anchorage, AK
POSITION STATEMENT: Opposes SB 185
ACTION NARRATIVE
TAPE 94-25, SIDE A
Number 001
CHAIRMAN TIM KELLY called the Labor and Commerce Committee meeting g
to order at 1:50 p.m.
The first order of business to come before the committee was SB 305 5
(LICENSING OF LANDSCAPE ARCHITECTS).
SENATOR SUZANNE LITTLE, prime sponsor of SB 305, outlined the
following changes in the draft committee substitute:
(1) The original draft of the bill added two members to the
State Board of Registration for Architects, Engineers and Land
Surveyors. That has been removed in the committee substitute and
it will remain at nine voting members on the board. The committee
substitute provides that there will be additional nonvoting
landscape architect on the board for one year, and that nonvoting
member will not be reimbursed for per diem and travel expenses.
(2) The requirement that the board administer a written
examination at least twice a year has been changed to at least once
a year.
(3) A new definition for "landscape architect" has been
included in the committee substitute.
(4) Sections 33 & 34 in the original bill were deleted in the
committee substitute.
Number 055
SENATOR KELLY asked George Davidson the position of the Board of
Architects, Engineers and Land Surveyors on the committee
substitute. GEEORGE DAVIDSON responded that there were five
members on the teleconference in the morning, and three of the five
endorse the changes and two were undecided.
Number 065
SENATOR RIEGER asked if with the committee substitute, people who
just do ordinary landscaping are still able to do that. SENATOR
LITTLE answered that was correct. There is a specific definition
in statute for "landscape contractors," however, it is not in this
legislation. She added there is a big separation between a
landscape contractor and landscape architect and that is clearly
defined.
Number 075
SENATOR RIEGER moved that CSSB 305(L&C) be adopted. Hearing no
objection, the motion carried.
SENATOR RIEGER moved that CSSB 305(L&C) be passed out of committee
with individual recommendations. Hearing no objection, it was so
ordered.
Number 110
SENATOR KELLY brought SB 347 (LIMITED LIABILITY COMPANIES) before
the committee as the next order of business.
LARRY MEYERS, Director, Division of Income & Excise Audit,
Department of Revenue, presenting a brief overview on limited
liability companies, said they are hybrid, possessing both
characteristics of corporate and partnership attributes. Under
existing laws the State of Alaska does not tax partnerships, only
corporations. SB 347 does not address the taxation method under
limited liability companies. Of the 36 states that currently have
this type of legislation enacted, the vast majority follow what the
Internal Revenue Service has determined to be the taxable
structure, which is partnerships. Absent any clarification from
the Legislature, Alaska will adopt what the IRS determines as far
as a taxable nature, which, in this instance, if it is a
partnership it will be another entity that is not subject to being
taxed.
Mr. Meyers said because LLC's are relatively new there isn't a lot
of history behind the tax impact. Several states have shown that
it is revenue neutral. Most of the states that have adopted
limited liability corporations also have individual income tax, and
while these entities would not taxed at the LLC level, they would
pick up the income at the individual level. Two states, like
Alaska, do not have individual income tax, but the two states have
treated LLC's as corporations, thereby subjecting them to being
taxed at a corporate rate.
Mr. Meyers related that the Department of Revenue has based its
fiscal note on the assumption that over the last three years the
Department of Commerce has registered 1,100 new corporations on an
annual basis. However, the Department of Revenue has not addressed
the conversion of existing C corporations into the LLC's; they have
focused only on new corporations that would enter into the stream.
Number 205
SENATOR KELLY asked if the Department of Revenue supports SB 347.
LARRY MEYERS responded the department supports it in theory,
however, their concern is the taxation method.
SENATOR KELLY asked if in statute it could be treated as a
corporation. LARRY MEYERS acknowledged that it could be done with
a simple amendment in the definition of "corporation" that would
include limited liabilities companies.
Number 221
BRIAN DURRELL, a lawyer with the Anchorage law firm Bogle and
Gates, testified from Anchorage in support of SB 347. He said he
has been very active in the development of the LLC legislation
through a working group of lawyers and accountants in Anchorage.
Mr. Durrell said there are different business entities that
organizers of businesses may select from in setting up Alaska
businesses. They could select a sole proprietorship, joint
ventures, partnerships, limited partnerships, S corporations or C
corporations. Of those entities, the State of Alaska only has
income tax against C corporations, and, consequently, if an
organizer of a business chose an LLC form of business, there would
be no tax revenues lost to the State of Alaska. He stated the only
entity that is at issue today is a C corporation, and it is
unlikely that many of those C corporations would reorganize into
the form of an LLC.
Mr. Durrell addressed several concerns he has with the fiscal note
developed by the Department of Revenue.
Number 315
SENATOR KELLY asked Mr. Durrell if he would continue to support the
bill if a tax provision were added to the bill that would include
an LLC under the definition of "corporation." BRIAN DURRELLL
replied that he thought doing so would have a detrimental effect on
the legislation because the purpose of the legislation is to have
the limited liability business entity that has the partnership
method of taxation and that would be a substantial impact on that.
Number 342
JOHN HOFFER, an attorney with the Anchorage law firm Fortier and
Mikko, voiced his support for SB 347, primarily because he sees a
lot of clients that would like to organize as an LLC, but they
cannot do so. Many small businesses do not consider organizing as
C corporations primarily because of the risk of double taxation at
the federal level so they are faced with a choice of organizing
either as a general partnership, or a limited proprietorship, or an
S corporation. In his view, the people who are going to be looking
at this legislation and deciding whether they want to organize as
an LLC, or a partnership, or an S corporation, are the kinds of
businesses that are not going to be subject to tax under current
Alaska law anyway, so there is really very little potential of
revenue loss with this LLC bill.
Mr. Hoffer pointed out that other states that subject LLC's to
income taxation do it because they also have a personal income
taxation and they don't want the LLC to be a loophole whereby a new
business entity can escape taxation. He believes it would be
inappropriate for Alaska to have an income tax for LLC's and to
leave the other ones untouched.
Number 398
BOB MANLEY, representing the working group of members of the tax
and business law sections of the Alaska Bar Association, as well as
members of the Alaska Society of CPA's, stated he favors the
legislation and disagrees strongly with the fiscal note prepared by
the Department of Revenue.
Mr. Manley believes that LLC's are going to replace S corporations
and partnerships, but they are not going to take away any corporate
income tax from the State of Alaska.
Number 460
SENATOR KELLY closed the public hearing on SB 347, and stated it
would be back before the committee at a later date.
Number 465
SENATOR KELLY brought SB 185 (LIMITATIONS PERIOD FOR TAX)
ASSESSMENTS) before the committee as the next order of business.
BRUCE BOTELHO, Attorney General, Department of Law, reiterated that
what is at stake is not a dispute about how much tax an oil company
owes, and it is not a dispute about whether the Department of
Revenue's assessments reflect a correct or incorrect application of
the production tax or the income tax laws. What is at stake is
whether there can even be a determination of who is right and who
is wrong, and how much is actually owed under the state's revenue
laws.
SB 185 confirms the state's interpretation of two statutes of
limitation. The first is AS 43.05.260, which is the three-year
assessment limitation. The interpretation which the state has held
and which this legislation will confirm is that so long as the
Department of Revenue issues an assessment within the three-year
period of time, it may later amend that assessment to reflect new
evidence that arise from discovery, as an example. The second is
AS 43.05.270, which is the six-year limitation on collections. The
statute, on its face, declares that the department must initiate a
collection action within six years of the assessments. The state's
interpretation is that the period does not run while the taxpayer
continues to dispute the amount that is actually due. The purpose
of statutes of limitation, and particularly in this context, is to
put a taxpayer on notice that a particular type and a taxed year is
in dispute in a timely fashion so that taxpayer may preserve the
documentation necessary to determine what the correct tax liability
is.
Attorney General Botelho said that in May 1993, the State and Exxon
had agreed to a stay to the Exxon case currently under Appeal in
the Alaska Supreme Court to allow both parties to see if they could
resolve the outstanding differences. Attorney General Botelho
lifted that stay in January and the Supreme Court has scheduled the
matter for oral argument in May.
The state and oil companies cannot and will not be able to settle
their differences so long as the companies assess their risk on
disputed taxes that are affected by the statute of limitations as
zero. Meaningful negotiations cannot be concluded until there is
some fundamental thinking of that view.
While the Supreme Court will hear the argument in May, he does not
believe that it is likely that the court would issue its decision
for at least several months, perhaps for more than a year
afterward. These major tax disputes are accumulating horrendous
amounts of interest, well over a $1 million a day. He said in his
view, passage of SB 185 will put the state back on track towards
early meaningful resolution of the disputed taxes.
TAPE 94-25, SIDE B
Number 020
In concluding his comments, Attorney General Botelho urged the
enactment of SB 185.
Number 055
SENATOR KELLY asked why there were the retroactivity and
prospective provisions in the bill. ATTORNEY GENERAL BOTELHO
answered the retroactive nature of it is to cover and basically say
that when the Legislature enacted the original AS 43.05.260 & 270
intended these features that are not embodied in the statute, but
which are virtually universal in the civil context the idea of
relation back and tolling. The retroactivity is to make clear that
they are to cover those past tax years that are in dispute. With
respect to its prospectivity, it is simply a reflection that this
has been a consistent view, not only of the Executive Branch, but
that of the Legislature as well.
Number 060
SENATOR LINCOLN thanked the Attorney General for his letter of
April 7 in response to several statements made by Joe Householder
on behalf of the Alaska Oil and Gas Association at the committee's
March 22 hearing on SB 185. She then asked him how critical he
thinks it is that the Legislature take an action on SB 185 before
the Supreme Court hears the case in May. ATTORNEY GENERAL BOTELHO
responded that SB 185 is a very important bill for two reasons:
(1) the risk to the state that the Supreme Court may conclude that
the state interpretation is incorrect; and (2) it is important to
see early resolution of what are the most difficult of all the tax
cases.
Number 105
SENATOR KELLY requested that Attorney General Botelho provide the
committee with a copy of his testimony so that it would not have to
be transcribed. Also, he said he would direct staff to contact the
other oil producing states to find out if they have had long-
ranging cases such as this, as well as to set up with the
Department of Revenue a detailed briefing on the developments of
these cases and why they have taken so long.
Number 120
WALT FURNACE, General Manager of the Alaska Support Industry
Alliance, testifying in opposition to SB 185, said it would give
the Department of Revenue multiple opportunities to change its mind
in tax assessments without regard to any time limitations.
Mr. Furnace said it is no longer a foregone conclusion that the oil
industry will remain healthy here in Alaska. There are a lot of
new investments that can be made here by industry, but the oil
companies themselves are competing against the businesses overseas
to get capital to keep going in Alaska. The lack of clarity on the
basis of paying state taxes and royalties after 16 years of
production on the North Slope continues to be a major obstacle in
Alaska.
Mr. Furnace said in terms of stability, SB 185 will be a major step
in the wrong direction. He questioned that if Alaska can do this
and get away with it, who in his right mind is going to want to
come here and invest a lot of money when there is no way of knowing
that today's tax system won't be changed retroactively sometime in
the future after he has made his investment. The Alaska Supreme
Court has a case pending before it on the meaning of the three-year
statute of limitation. SB 185 will take that decision, in this
case, away from the court by retroactively changing the law so that
the department will win.
Mr. Furnace expressed his concern that SB 185 is being supported by
the present Administration, and he urged that the oil industry not
be driven out of Alaska by passage of such legislation.
Number 245
PAUL WESSELLS, Vice Chairman of the Alaska Oil & Gas Association
Tax Committee, testified from Anchorage via the teleconference
network. He stated AOGA's strong opposition to SB 185, which would
represent bad tax policy for the State of Alaska. It would set a
terrible precedent, while provoking more litigation than it would
resolve. It not only singles out the oil and gas industry, it
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.
Mr. Wessells noted that former Attorney General Cole has said that
what is being proposed in SB 185 is not unlike the statute of
limitations found in many of the lower 48 states, and, in
particular, Texas. He said that is not true, and according to
their research, they found not a single state with specific
language that parallels that of SB 185. Also, it has been their
members' experience in the lower 48 that once a state has made a
determination of the taxpayer's tax liability, generally there is
no increase in the assessment; it is either sustained or amended in
favor of the taxpayer. Not one of those states has ever
retroactively amended their statute of limitation provisions, and
such a retroactive provision would likely be unconstitutional.
Mr. Wessells stated that if SB 185 passes, there will be no tax
certainty, there will be no tax stability and there will no tax
fairness. There will be never ending tax administrative and
judicial proceedings without resolution. He urged rejection of SB
185.
Number 595
HUGH MALONE, a former commissioner of the Department of Revenue
representing himself, stated his support for SB 185. It has been
the state's effort, to his knowledge, to try to determine the
correct amount of tax that is owed for a severance tax or an income
tax for any particular year. To assess that tax and to collect it,
sometimes, because of the availability of information and the
research that's necessary to develop it, it takes awhile to make
that determination. He said it is not in the best interest of the
people of the state to have any taxpayer pay a sum different from
what they owe the state, and it isn't in the interest of the state
when talking about its primary source of revenue to potentially
dismiss several billions of dollars based on what he believes is a
technical loophole or argument that can be made to avoid payment of
the correct amount of tax by a taxpayer.
Number 650
JOHN SACKETT, a former legislator elected to the Legislature in
1966, noted that in the entire 18-year period he served in the
Legislature he was on the Finance Committee, for eight of those
years he was chairman and co-chairman.
He said during the period of time that he was in the Legislature
was a period of time that the State of Alaska participated and
attempted to "arrive" at some "fair share" of the resource up on
the North Slope. He then gave a historical prospective from a
legislative standpoint beginning in the year 1967 as to what that
is. In 1967 the severance tax was at one percent. During his 18
years in the Legislature 10 different changes were made to the
taxation laws going through all of the different methods.
TAPE 94-26, SIDE A
Number 001
Continuing his testimony, Mr. Sackett said it wasn't until about
1986 that he felt that the State of Alaska had finally reached
their fair share of the legislation. When it was changed the last
time, the tax was lowered somewhat overall, but it was increased
for some other areas. Since then, the Department of Law and the
Department of Revenue have been attempting to collect a variety of
different taxes from the oil industry. At the same time that they
are collecting there have settlements with the oil industry of
approximately $1.3 billion on taxes that they have contested and
settled out of court. During the process of settling these cases,
the State of Alaska realized that the amount of the valuation that
oil industry was saying that they had on the state's oil was a lot
more than they were telling the state. As a result of this, there
were reassessments that had to occur during that period of time.
Based on a technicality, he believes the oil industry is attempting
to escape their liability.
Mr. Sackett stated that as a former legislator he never felt that
any of the money, whether it was at one percent when he started or
at 33 percent when he left the Legislature, belonged to him as an
individual. The taxes that were collected belong to the people of
state and, as a legislator, he had the responsibility to ensure
that to the maximum extent possible, the people of this state
received their fair share. He said the legislators have that
responsibility now to make sure that the people of this state
receive their fair share.
Number 073
GEORGE FINDLING, Manager of Government & Public Relations for ARCO
Alaska, stated their opposition to SB 185. He said the legislation
casts an ominous shadow over the future because it will introduce
further future tax uncertainty and drive even more investment
dollars from Alaska.
Most Alaskans agree that oil and gas development is and will be the
economic life blood of this state. Therefore, ARCO thinks it is in
the state's interest to encourage this activity to attract
investment back to Alaska. ARCO has a long history of commitment
to the state, but they do have a broad range of investment
opportunities, both in Alaska and other locations.
Mr. Findling stated that SB 185 is not intended to collect the
correct amount of tax, rather it is designed to allow the
Department of Revenue to have unlimited time to invent constantly
changing schemes to collect more tax than the Legislature ever
intended.
Concluding his comments, Mr. Findling said ARCO believes that the
state can choose a considered approach for the future in which the
value of tax certainty is seen and investment by the oil industry
is encouraged.
Number 150
NORMA CALVERT, representing Marathon Oil Company, stated the
company's opposition to SB 185 because they feel it is bad
legislation, both for the State of Alaska and for the taxpayers.
Ms. Calvert said Section 2 of SB 185 has the potential to require
the taxpayer to stand ready forever and a day. It permits the
Department of Revenue to increase or decrease the amount of tax by
amending an assessment at any time during the administrative
consideration of the taxpayer's grievance on an assessment, or a
claim for credit, or a refund of a tax. This rule, if adopted,
would differ from the rules of most other states' tax
administration.
Referring to Section 3, which extends the period of limitations
during which the tax may be collected by levy or by proceedings in
court to six years after a final administrative or judicial
resolution, Mr. Calvert said Marathon believes it is unreasonable
considering that other states and the federal government suspend a
statute in similar situations. For example, in Texas, the statute
of limitations on a levy is suspended where the assessment is
challenged in court, and the federal system is similar. Alaska, in
extending the period for six years after the final administrative
or judicial proceeding, is going beyond what is considered
reasonable in other jurisdictions.
Ms. Calvert stated the members of Marathon Oil respectfully request
that the members of the Senate Labor & Commerce Committee reject SB
185.
Number 244
VAL MOLYNEAUX, representing VECO International, Inc. and Norcon,
Inc, stated VECO's opposition to SB 185.
Mr. Molyneaux pointed out that since the economic Limit Factor Tax
(ELF) was introduced during 1989, various major oil industries have
left the State of Alaska. They include Chevron, Amoco, Texaco and
Conoco. These companies are now investing their time and money in
other locations. The passage of SB 185 would probably result in
the remaining major oil companies, Exxon, BP and ARCO to invest
their exploration and development dollars in more favorable
business environments around the world and not in Alaska.
In conclusion, Mr. Molyneaux said passage of SB 185 would most
likely result in the loss of jobs for Alaskans and reduction in
revenues to the State of Alaska.
Number 300
BECKY GAY, Executive Director, Resource Development Council,
testified from Anchorage in strong opposition to SB 185.
The council believes SB 185 is bad policy for the following
reasons: it is a disincentive for timely assessments; it rewards
and it codifies bad behavior; it will discourage investment for
Alaska; it is unfair because it singles out one industry on which
to apply retroactive taxes; and it is a shortsighted attempt to
retroactively beef up the present while shortchanging the future of
resource investment in Alaska.
Ms. Gay stated the council's support for the testimony in
opposition to SB 185 by the oil companies and AOGA.
Number 351
JOHN RINGSTAD, representing BP Exploration (Alaska) Inc., stated
their endorsement of previous testimony on SB 185 by Paul Sullivan
of Exxon and of the Alaska Oil & Gas Association.
Mr. Ringstad said passage of SB 185 will mean the only way a
taxpayer can gain closure on a tax obligation will be to pay
whatever the auditors determine in the first assessment, otherwise
there is prospect of a second or maybe eighth assessment.
Also, SB 185 seriously interferes with the state's judicial
process. The state lost its argument before the Superior Court in
this issue, and the Supreme Court is scheduled to hear it next
month. The Administration is asking the Legislature to pass a bill
clarifying the original legislation before the Supreme Court
reviews a case. In effect, the Legislature is being asked to tell
the Superior Court that the statute it interpreted was a phoney and
SB 185 is really the authentic legislation.
Mr. Ringstad cautioned that SB 185 means more litigation, not less,
and he suggested the committee take independent advice about the
constitutionality of it.
Number 400
On conclusion of the public testimony, there was a question and
answer period between the members of the committee and Attorney
General Bothelo. SENATOR KELLY then stated SB 185 would be back
before the committee at a later date.
There being no further business to come before the committee, the
meeting was adjourned at 4:20 p.m.
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