Legislature(2011 - 2012)BUTROVICH 205
01/30/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Status of Integrated Tax Management System & Oil and Gas Tax Reporting Update by Commissioner Bryan Butcher, Department of Revenue | |
| Review of Comprehensive Plan and Feasibility Study by Fast Enterprises | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 30, 2012
3:33 p.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Thomas Wagoner, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Bert Stedman
Senator Lesil McGuire
Senator Hollis French
Senator Gary Stevens
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
COMMITTEE CALENDAR
STATUS OF INTEGRATED TAX MANAGEMENT SYSTEM & OIL AND GAS TAX
REPORTING UPDATE BY COMMISSIONER BRYAN BUTCHER, DEPARTMENT OF
REVENUE
- HEARD
REVIEW OF COMPREHENSIVE PLAN AND FEASIBILITY STUDY BY FAST
ENTERPRISES
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
BRYAN BUTCHER, Commissioner
Department of Revenue (DOR)
Anchorage, AK
POSITION STATEMENT: Gave presentation on the history of the
state's tax management system, PPT to ACES to today.
BRUCE TANGEMAN, Deputy Commissioner
Department of Revenue (DOR)
Anchorage, AK
POSITION STATEMENT: Presented timeline for the completion of the
tax revenue management system (TRMS).
JOHANNA BALES, Deputy Director
Tax Division
Department of Revenue (DOR)
Anchorage, AK
POSITION STATEMENT: Answered auditing questions about the TRMS.
ACTION NARRATIVE
3:33:12 PM
CO-CHAIR JOE PASKVAN called the Senate Resources Standing
Committee meeting to order at 3:33 p.m. Present at the call to
order were Senators Stedman, Stevens, Wielechowski, French, Co-
Chair Wagoner and Co-Chair Paskvan.
^Status of Integrated Tax Management System & Oil and Gas Tax
Reporting Update by Commissioner Bryan Butcher, Department of
Revenue
Status of Integrated Tax Management System and Oil and Gas Tax
Reporting Update by Commissioner Bryan Butcher, Department of
Revenue
3:34:30 PM
CO-CHAIR PASKVAN announced as background to the Fast Enterprises
study by the Department of Revenue (DOR) the department released
its oil and gas tax status report to the legislature on January
18, 2011. The executive summary stated under Item 6:
The department continues to write regulations for the
new tax system and the first audits under the net
profit tax have been completed. The department has,
however, been hampered in its tax reporting and
compliance effort by a lack of a centralized data base
to house and manage the large volumes of oil and gas
data it receives.
Later in the report on pages 6 and 7 it indicates:
While capital expenditures over the five-year period
in (2006-2010) since the implementation of a net
profits tax with credits for capital expenditures have
increased each year, we have limited data as to the
nature of the expenditures. The Department of Revenue
has extremely limited data from which to determine the
nature of the capital expenditure increases. In part,
this raises the question which was raised last Friday:
'What has the State of Alaska received for the
billions of dollars we have invested in the oil
industry with our capital credits? What is Alaska's
return on that investment? How does the Department of
Revenue measure what we get for those capital
investments?'
CO-CHAIR PASKVAN said these questions have concerned him deeply
for the last year. However, even a year ago he didn't fully
appreciate the magnitude of the problem. Only after the
conclusion of the 2011 legislative season did he discover the
Comprehensive Plan and Feasibility Study that was prepared by
the Department of Revenue by Fast Enterprises of Denver
Colorado. This study cost $300,000 and its executive summary of
was alarming.
He said that a representative of the Fast Enterprise Group was
invited to present the study to this committee; however he
respectfully declined because they might bid on a future
contract with the State of Alaska and that would present a
conflict. So he asked the Department of Revenue to discuss this
comprehensive plan and feasibility study that he believed was
one of the most important issues facing the legislature in the
2012 session.
CO-CHAIR PASKVAN said he discovered two other documents while
studying this issue. First was a memo from Marcia Davis that was
sent to all legislators in 2007. The memo included an analysis
by Spencer Hosie requested by the Alaska Department of Law about
"issues the state is likely to experience in enforcing and
collecting tax under a net tax regime." Mr. Hosie talked about
the need to "vigilantly audit Alaska North Slope taxpayers under
any tax, gross or net" and emphasized that "audit should be
conducted on a yearly basis and if an issue arises, it should be
dealt with promptly." He advised that:
To be clear, all else equal, a net tax will be more
complex to administer and enforce than a gross tax. If
the past is any guide, the taxpayers may well game
costs, for example, suddenly allocating an
inappropriately large percentage of joint or common
costs to their Alaska businesses. The state can
discourage overly creative cost accounting by
vigilantly auditing and enforcing the statute and
regulations from the outset.
CO-CHAIR PASKVAN said he looked forward to the commissioner's
perspective on these important issues that are facing Alaska
going forward.
The second document was a September 2008 document prepared by
then Revenue Deputy Commissioner, Marcia Davis, and Tax Division
Director, John Iverson, and Tax Division Deputy Director,
Johanna Bales. It is titled "Commercial Off-the-Shelf (COTS)
Revenue Management System, the Future of Revenue
Administration." One slide that stood out was on page 10, which
indicates, "What do we want to avoid? A train wreck." It says,
"Our ability to officially administer tax programs, maximize
revenue, and meet our mission will be derailed if we don't act
now."
3:39:30 PM
CO-CHAIR PASKVAN said with this information the question is,
"Where are we now?" He asked the commissioner to answer how the
legislature knows what DOR information is reliable and not
reliable.
3:40:15 PM
SENATOR MCGUIRE joined the committee.
3:41:06 PM
COMMISSIONER BRYAN BUTCHER, Department of Revenue (DOR), said he
would first go a little bit into the first half of the
presentation dealing with the history of the tax management
system, then go to PPT to ACES and to today, and then pass the
presentation along to Bruce Tangeman, who would go into
specifics on where we are today and what the timeline looks like
for the completion of the tax revenue management system (TRMS).
He would then go into the Comprehensive Plan and the Feasibility
Study leading up to where we are today.
He said a lot of discussion in today's debate compared to
previous attempts to look at our tax structure in PPT and ACES
has been about needing information, having better systems in
place and taking a look at significant changes. He wanted to
point out that although the department is certainly hampered
with the current tax management system, they get the job done
and responsibly. But they are not able to turn the information
around quickly; the manual work is a tremendous time waster. He
said they are taking a system "that is doing what has to be done
and not a whole lot more and turning it into a system that can
work for the state as well as the policy makers on a lot higher
level than it has before.
COMMISSIONER BUTCHER said the information available during
PPT/ACES debates wasn't the same that it is today. Because the
state was switching from a gross to a net tax, it had fairly
limited information for modeling, projections and a lot of
assumptions. As a result, the focus was more on modeling and
what the experts said than what it is now when they have a
snapshot of what has been going on in the oil patch.
3:43:43 PM
SENATOR FRENCH asked him what position he held during that time
and to quantify what he means by "more information."
COMMISSIONER BUTCHER replied that he worked with the Alaska
Housing Finance Corporation (AHFC) during that time and he was
not working on this issue. Most of the work he did other than
observing on this issue has been the year of having his position
as commissioner. He said they have a lot more information in
terms of operating capital and a lot more of an idea of what the
money is going into. They would prefer to have more information,
but they have more now than was available during the PPT and
ACES debates.
SENATOR FRENCH said that should have been laid out in the slide
because it appears that he is claiming they were "flying blind"
when they passed PPT and ACES and he resented that implication.
He said he sat through hours and hours of hearings and collected
vast volumes of information and asked the commissioner to be
more specific when he says they don't have information.
COMMISSIONER BUTCHER replied that he did not intend to make it
sound like they were flying blind, but to say that they simply
have more information today than they had then. As an example,
when PPT and ACES debates were occurring, the DOR fiscal notes
went up to a high of $80 a barrel and prices haven't been there
for quite some time; it's been in the triple digits for the last
few years. So, they are now historically able to see how the tax
works at the high price levels that currently exist.
SENATOR FRENCH said he didn't know if modern information
qualified as more information. In 2007, they didn't know what
the oil price would be in 2012, but that's not more information;
it's just a new piece of data. He said the commissioner would
find himself in semantic quibbles with members of the committee
if he wasn't careful how he construed that. He stated that the
industry is doing well at these high prices, just as the state
is.
3:47:05 PM
COMMISSIONER BUTCHER responded that was just one example. They
worked on a five-year look-back to connect tax credits to see
specifically what the state was getting.
SENATOR FRENCH said, "That's productive."
SENATOR STEDMAN recalled under PPT the administration was
working at $60 a barrel oil and below. And the legislature was
looking a little bit north of that and under ACES they were
looking at the $200 range. It was working with much broader
price swings than the administration was.
BRUCE TANGEMAN, Deputy Commissioner, Department of Revenue
(DOR), agreed that the whole point of these bullets is the type
of information that the department is able to work with. Months
of work by very intelligent and qualified economists and
contractors went into putting PPT together. But they really
couldn't look backwards and say how a net tax would affect
Alaska. A short year later, when the ACES debate geared up,
months of work went into that, too. But you still couldn't look
back over one year to see how the net tax worked, because such a
short time had elapsed between the two changes. The price went
up even more during the ACES debate. Finally, now in 2012 they
can look backwards at five years of oil prices including high
ones, which is the piece of information in comparing Alaska to
other oil producing regions.
SENATOR WIELECHOWSKI said he pulled some of his binders from the
ACES debate and found a field-by-field analysis that he had
found helpful at that time. They talked about the duty to
produce and the responsibilities that parties incur when they
take out a lease. They heard from Spencer Hosie, the state's
attorney in the Amerada Hess case, that his concept is if the
companies can make a reasonable profit they have an obligation
to produce. So based on that, they ran a series of hypothetical
fields - heavy oil, conventional oil, satellite fields - and
determined at that time at $40/barrel and at $60/barrel under
ACES, under ACES with a gross floor, under PPT, under a variety
of structures, that under ACES there were very high net present
values (good profits to be made) at $40/barrel and even more
good profits at $100/barrel. He didn't know that the analysis
changes a whole lot because if you've got a duty to produce and
$40/barrel you still have that duty at $100/barrel.
He thought it would be helpful to the committee to see net
present value and rate of return data on specific fields under
both ACES and the new proposed tax structure. But the reality is
if the company can make a reasonable profit under ACES, they
have a duty to produce.
3:52:22 PM
On a slightly different topic, Senator Wielechowski said a
presentation last year by Gaffney & Kline had a quote saying
"relative to other regimes Alaska is handicapped in its
decision-making by the small amount of either confidential or
reliable public data on energy operations." He asked the
commissioner if he felt the state was handicapped by the lack of
data.
COMMISSIONER BUTCHER replied yes, they could have more
information, but they have progressed from where they were in
2006/07/08. No question about it.
SENATOR WIELECHOWSKI asked if he would want laws on the books
that get us more information as part of this legislation - at
least provided to him and the legislature on a confidential
basis.
COMMISSIONER BUTCHER replied that he would be happy to work with
the committee on that. They believe this TRMS system is going to
be one big piece of doing that.
CO-CHAIR PASKVAN said the top bullet line says the rally cry has
been "need more information," and he hoped he wasn't saying that
factual information was bad for the process.
COMMISSIONER BUTCHER replied, "Absolutely not." It could have
been worded better, but the point is that they are in a better
place than they were three or four years ago, but improvements
still need to be made.
CO-CHAIR PASKVAN asked what he meant by saying "double standard"
in the next bullet line.
MR. TANGEMAN replied that this goes back to the information that
was used during the PPT and ACES debates - the theoretical
modeling they had been speaking of. They didn't get a good
chance last year to really delve into the modeling, but they are
ready to go down to that field-by-field analysis and compare
that with other regimes around the world and opportunities from
an oil company's perspective.
3:57:08 PM
SENATOR WIELECHOWSKI said, "I just want to let you know your
attorney disagrees with you on that." Spencer Hosie said that is
the wrong analysis; he says when you take out a lease in the
State of Alaska, you have an obligation to develop when you can
make a reasonable profit. It doesn't matter what you can make
elsewhere. Senator French said he thought they needed to have a
hearing on the duty to produce.
MR. TANGEMAN replied that he agreed "100 percent" that duty to
produce is clearly an important standard; the Alaska Oil and Gas
Conservation Commission (AOGCC) has a role in that, the
Department of Natural Resources (DNR) has a role in that and the
Department of Law has a role in that. But he said don't confuse
duty to produce with duty to invest, because there is no such
thing as a duty to invest in statute. If companies are following
what is in their lease agreements under the duty to produce
section and are meeting those standards that is what they need
to meet. But he wants them to invest above and beyond their duty
to produce line.
3:59:04 PM
SENATOR STEDMAN commented that he didn't want the public to
think the state's hydrocarbon basin is so simple that it just
comes down to the rate of return comparison. On a broader
perspective, there is the prospectivity in the basin, the
existing reserves and reserves potential, how easy is it to get
to and who has control of it. Alaska has one of the richest
hydrocarbon basins in the western hemisphere. And if you look at
the rate of return issue, it goes beyond that into your present
value, your cash flows and other opportunities available. They
will build on those complexities, but it's far more complicated
than making a 12 percent return and a 24 percent return
somewhere else. Alaska doesn't have an open access basin; it has
a controlled dominated basin with three major players and that
won't change.
He said they also need to keep in mind that having a high tax
burden with large credits - and if you don't reinvest in our
basin you will walk into a high tax environment - was a policy
put forward by the administration. These were direct policy
calls made by the state. They can get into fine tuning them and
review the volumes of data and presentations, but it's not just
a marginal tax discussion.
COMMISSIONER BUTCHER agreed and explained they focused this
presentation on working towards the information they have and
going forward with it. But many issues need to be discussed on a
bigger scale to determine what changes need to be made.
SENATOR STEDMAN followed up commenting on the bullet on slide 3
showing North Dakota, Alberta and Texas all booming and Alaska
in a decline. He said a lot of technological improvements in
shale oil advanced North Dakota, not tax changes; Alberta also
had technological improvements and the same with Texas. But the
slide doesn't really advance the discussion of what they need to
get on the table.
4:03:09 PM
COMMISSIONER BUTCHER explained that slide was making a point
that as they are gathering information they need to look at a
bigger picture, not just Alaska. He was right, North Dakota is
working to reduce their taxes right now, but their taxes weren't
reduced for that to occur. It occurred mostly because of the
price of oil and secondarily because of the technological
advances. Fracing has been around for a long time, but it wasn't
economic until oil was over $70 or $80 a barrel.
CO-CHAIR PASKVAN said North Dakota and Texas have a gross tax
system with no credits and higher royalty than Alaska and he
asked if the department was advocating returning to a gross tax
with no credits and higher royalty.
COMMISSIONER BUTCHER replied no; they were pointing out things
that need to be discussed in the future. It wasn't the focus for
today.
CO-CHAIR PASKVAN asked if he agreed generally that North Dakota
and Texas have a gross tax with no credits and a higher royalty
than Alaska.
COMMISSIONER BUTCHER answered for the most part that is correct.
It varies a little bit because they work with private land
holders.
MR. TANGEMAN said one of the challenges going forward would be
trying to compare apples to apples, because Alaska's tax system
is more complicated than that.
COMMISSIONER BUTCHER reviewed slide 4, legislative history,
saying the PPT legislation became effective April 1, 2006, and
primarily changed from a gross tax system to a net tax. ACES
passed in late 2007 with many provisions effective on July 1,
2008 and some retroactive to July 1, 2007.
CO-CHAIR PASKVAN asked if the 2006 audit was four months of the
ELF system and eight months of PPT.
MR. TANGEMAN replied three and nine, actually.
CO-CHAIR PASKVAN said, so the first full year of PPT was 2007
and no audit has been completed of 2007.
MR. TANGEMAN responded that they are currently auditing 2007.
ACES made retroactive changes back to July 1, 2007. He explained
they would have gotten the trued up tax statements from industry
on March 31, 2008, so it will be four years in a couple of
months. Statute says six years, so they are well within the
statutory guidelines. It's key to remember that going from ELF
to PPT was a huge change and one short year later another change
was made. He said he was proud of the job the Tax Division is
doing to be where they are in the audit process. Every time a
change was made allowed the taxpayer the opportunity to amend
their tax returns. That is why 2006 was held open so long. The
year 2007 is under two different tax structures, so it's another
complicated audit. But based on changes that have been made, the
lack of a system that the division had to deal with, the manual
processes they had to use, it's an incredible accomplishment to
be where they are. Going forward, they are getting better and
more comfortable with the net tax system. Once the TRMS is on
line in two to five years they will be even more comfortable.
CO-CHAIR PASKVAN said the short answer is that there has been no
audit from 2007 to date.
MR. TANGEMAN replied correct.
SENATOR STEDMAN recalled that the department was extremely
aggressive in pursuing the changes in ACES and asked why would
they do that if they couldn't keep up?
COMMISSIONER BUTCHER replied they can't speak for whatever the
previous administration pursued in terms of tax changes; they
can just speak from the perspective of 2012, seeing what
occurred and what they heard occurred previous to 2011. He
equated developing the process of moving from gross to net to
reaching the top of the mountain, and now they are coming back
down the other side of the mountain. It's the same distance, but
they expect it to go considerably faster than it did before
because of the work they have done setting everything in place.
They aren't having to reinvent the wheel.
4:10:04 PM
SENATOR WIELECHOWSKI asked if the state had missed any statute
of limitations deadlines on any of its royalty or tax auditing.
COMMISSIONER BUTCHER replied not from the Department of
Revenue's perspective, but he didn't know about the Department
of Natural Resources.
MR. TANGEMAN said the royalty was not in their purview.
4:10:48 PM
JOHANNA BALES, Deputy Director, Tax Division, Department of
Revenue (DOR), agreed that the department had not missed any oil
and gas production tax audits statute of limitations.
CO-CHAIR PASKVAN asked the first time the commissioner had
knowledge of a completed Fast Enterprises study.
COMMISSIONER BUTCHER replied the first couple of weeks he
started his job in early 2011.
CO-CHAIR PASKVAN asked if there was some reason that report was
not shared with the legislature at the start of the 2011
session.
COMMISSIONER BUTCHER replied that it was funded in the capital
budget and wasn't a secret. He certainly didn't make a decision
to not share it.
CO-CHAIR PASKVAN asked why the DOR requested funds for the Fast
Enterprise study.
COMMISSIONER BUTCHER replied that he would get to that answer in
a little more detail going through the slides. Or did the
Chairman want him to start now?
CO-CHAIR PASKVAN asked him to go into it now.
COMMISSIONER BUTCHER said touching on it briefly, the state was
in a gross tax system from 1997 to 2006; it was the FoxPro
System that collected and reported volume and tax payment data;
the data was automatically loaded into excel spreadsheets
annually by staff. There wasn't an electronic filing capacity
and it had outlived its usefulness and was no longer compliant
with standards that had been set by the State of Alaska.
At that point, there were significant and sweeping changes to
the oil and gas production taxes from gross to net. Monthly
information reports were coming consisting of millions of lines
of data, audit information consisting of millions of lines, and
they needed the ability to track credits and automated systems,
and antiquated tax systems began to fail. He said the Tax
Division had long been aware of its need to update its current
systems for tracking and managing tax returns and other taxpayer
information. That became an even more serious issue after the
passage of PPT and ACES. In the spring of 2007, after PPT had
passed but pre-ACES, the department contracted with the Alaska
Information Technology Group for a study to evaluate its current
oil and gas tax systems. The preliminary requirements for a
system were published in October 2007; the remainder of the
study was completed and published in January 2008.
He said the study recommended a custom-built solution with an
estimated cost of $2.6 million. During the 2008 legislative
session, the department requested the $2.6 million to create an
automated system to track oil and gas tax returns, credits and
data. Funding was provided during the 2008 legislative session
in FY2009. The study and system requirements were to create a
system to calculate monthly and annual tax obligations, accept
payments, collect and validate data, audit support through
reporting and tracking, forecast future tax revenue, data
analysis and reporting and to interface with newly created
systems and existing Tax Division systems.
COMMISSIONER BUTCHER provided a breakdown of what the department
did with the money; under the net profits tax system it set up a
credits tracking system and an on-line tax information system
(OTIS) that allows for on-line payment and uploading of reports
(although they don't upload into a database, which it will do
with the new system). Those two systems were put together
internally by Tax Division programmers. An IT contractor came in
and created the off-take volume reporting (OVR), which tracks
wellhead production data and provides economic research unit
forecasting data. However, he said data is still manually
entered into the OVR by staff. It also developed an economic
monthly report, which provides information for economic
forecasting models, and here once again, data would be manually
entered.
4:16:02 PM
He related that after ACES passed, the department in the fall
2008 realized $2.6 million was insufficient to fund an
integrated revenue management system after it conducted its own
study. The governor's proposed FY10 capital budget included
$23.4 million for a tax revenue management system, a project
that got zeroed out. In fall 2009, the DOR requested $34 million
for a tax revenue management system to be included in the
governor's 2011 capital budget.
4:16:53 PM
SENATOR STEDMAN asked for clarity about why the FY10 capital
budget didn't include the funds.
COMMISSIONER BUTCHER replied that he didn't know.
SENATOR STEDMAN asked who included the $34 million in the 2011
budget.
COMMISSIONER BUTCHER replied that it was submitted by the
legislature.
4:18:36 PM
SENATOR STEDMAN said the governor didn't submit it - the point
being that the legislature stepped in to fund this project "to
get us off a potential train wreck." Dealing with billions of
dollars is a serious issue and it's abnormal for the legislature
to put in a request of $34.6 million and let the administration
work its way through that process. He said it is a concern that
when we have this type of a challenge in our record keeping that
we're not more aggressive in getting to a solution.
COMMISSIONER BUTCHER said he was talking about the fall of 2009
after the project was deleted. Then the department came back to
the governor with a different number.
^Review of Comprehensive Plan and Feasibility Study by Fast
Enterprises
Review of Comprehensive Plan and Feasibility Study by Fast
Enterprises
4:19:05 PM
CO-CHAIR PASKVAN referenced the executive summary of the Fast
Enterprises report and asked if the excerpt from page ii (7) of
the summary is accurate as follows:
The Department of Revenue tax cannot easily produce
reports required by the legislature and policy makers
because the current systems prevent timely, complete
and correct extraction of data. Reports can be
inaccurate and misleading due to incorrect and
incomplete data and human error.
COMMISSIONER BUTCHER responded that is what the report says, and
that is why it was in the governor's budget in the previous
year.
CO-CHAIR PASKVAN said his point is if the rallying cry is "needs
more information," connecting that with this seems to indicate
that one should be hesitant to accept the reliability of the
DOR's numbers because of human error.
MR. TANGEMAN replied that is why the timeline is about PPT to
ACES and then to where we are today. Systems were in place, but
the systems put in place since PPT and ACES are a significant
improvement and they won't compare to where the TRMS system will
take us. The information they are generating today, especially
with the monthly reports, weren't even available during the PPT
and ACES debates. Significant steps have been made.
4:21:29 PM
CO-CHAIR PASKVAN asked if Fast Enterprises completed its study
in October 2010.
MR. TANGEMAN replied yes.
CO-CHAIR PASKVAN said that study indicates that the vast
majority of our oil and gas production tax system is done
manually and asked if he agreed.
MR. TANGEMAN replied yes, but it's a better system than what was
in place years before that.
COMMISSIONER BUTCHER said that as a result in 2010, due to the
increased request of over $10 million from the previous request,
the governor included $300,000 in his FY2011 budget for a TRMS
study. That was funded in FY2011, which resulted in the FAST
study.
He related that in July 2010, a request for proposal (RFP) was
put out for a study to determine the feasibility, scope and
estimated cost. Fast Enterprises in Denver was awarded the
contract, and conducted its study in fall 2010 and it came out
in October 2010. He said the funding for the TRMS was put in
during 2011 session and enacted during FY2012. A simple
breakdown of the timeline was on slide 12 and the Comprehensive
plan and Feasibility Study Major Findings was on slide 13 as
follows:
The DOR/TAX manages over $3 billion in Oil and Gas Tax
revenue using an eclectic mix of home-grown side-
systems that include multiple databases and unsecured,
unstable spreadsheets stretched well beyond their
intended use. A lot of manual information is still put
into these taking up more staff time than they would
prefer.
The 17 systems used to administer different taxes and
functions have been pieced together over the past 15+
years without integration or an overall architecture.
The DOR/TAX constructed the current tax systems as
silos of information pertinent to only the specific
tax types they serve. Sharing data with other tax
systems is difficult, requiring customized interfaces,
or manual processes.
The vast majority of the agency's business processes
are done manually and as a result, TAX employees spend
a higher proportion of their time compiling,
organizing, and reconciling data than actually
auditing, examining, analyzing, forecasting, or
managing tax programs.
The limitations and inflexibility of existing systems
impose a burden on taxpayers. It's not easy for them
to get the information to the department; there isn't
a set format to put every tax into a central database.
4:25:37 PM
CO-CHAIR PASKVAN said the last two were critical points. The
last one is from the taxpayer's standpoint and is an expression
of frustration so to speak, because of dealing with the DOR's
inefficiencies and before that is an expression of frustration
by the DOR employees that they are spending all their time
compiling, organizing and reconciling "without actually
auditing, examining, analyzing, forecasting or managing the tax
program." He asked him to explain the impact of that to the
department and the taxpayers.
COMMISSIONER BUTCHER replied the things that need to get done in
terms of auditing, examining, analyzing and forecasting are
getting done, but they are not being able to give nearly the
amount of time they would like to, because a lot of auditors,
including high level auditors, spend time reconciling and
compiling data when their time would be better spent digging in
and going a little bit deeper in areas they are qualified and
educated to do.
COMMISSIONER BUTCHER said one of their happiest days was finding
out this had been funded.
4:27:41 PM
MR. TANGEMAN said they had started to standardize a lot of the
forms; the taxpayers are beginning to see it. Information will
be coming in through a single portal and be uploaded into the
TRMS system. It has been a good learning experience.
SENATOR WIELECHOWSKI said he expected a debate on credits this
session and asked if he was at a point in their system where
they could provide the legislature with accurate data that shows
how it has been working in recent years.
COMMISSIONER BUTCHER replied they are not exactly there, but
they are getting closer. For example, they know very little
about a lot of credits in the last five years, because they
weren't asking for it - more because the focus was on the
application and administration of the tax.
He said the department began a five-year look back on what
companies were spending to qualify for the credits and not every
company submitted information, but most had. Going forward will
be a much easier process of getting the information than
compiling it in a five-year look back.
CO-CHAIR PASKVAN said the COTS September 2008 presentation has a
chart about Idaho's experience. For each year their system was
in place the benefit was greater than the cost to that
jurisdiction and he asked if the State of Alaska should receive
more than the cost that it has invested in this management
system.
COMMISSIONER BUTCHER replied it is very likely that will happen.
He explained that auditors are focused on getting information
for the legislature over the course of the session, which takes
their focus off of other things for almost a quarter of a year.
It will help to have the information in a more manageable
format.
4:32:57 PM
SENATOR MCGUIRE held up a US Department of Energy picture of a
simplified barrel of crude oil divided into the various products
that are made from it by percentage and said it would be helpful
as they move forward to see visuals like it from the state. It
would be good for both lawmakers and the public to really
understand in a visually simplified way what is being taxed and
credited out of a single barrel of oil in Alaska - at some point
field by field. It would include: CAPEX, OPEX, tariffs,
royalties, severance taxes, property taxes at each of the
municipal layers, federal taxes and the profits.
Secondly, she said embedded in SB 85 is a bill she introduced
asking to have a Competitiveness Review Commission. That idea
came from Alberta that went through a very similar kind of
process. They had an ELF at one point, something like a PPT, and
then high oil prices hit. They enacted a windfall profit tax;
the government was recalled and they went through the journey
they are on now of reforming that system to make it more
competitive. To do that they launched a competitiveness review
with people from the private sector - accountants, petroleum
engineers, mom and pops.
COMMISSIONER BUTCHER agreed that it is a challenge to get
accurate data to where it is easily understood. The complexity
of our tax system makes it even harder.
SENATOR MCGUIRE pointed out the previous Friday presentation
showed $4 billion in credits and remarked, "Why are we even
looking at our ACES system? I mean this is outrageous!" If
you're a member of the public and see that, you're going to pick
up the phone and call your lawmaker and say that without
completely understanding the complexity.
4:39:01 PM
CO-CHAIR PASKVAN said in addition to credits, there is a
question from the public as to what the state gets for allowing
a deduction of the cost compared to going with a gross system.
This is somewhat referenced in the October 2007 memo from Marcia
Davis, Deputy Commissioner, Department of Revenue in which
Spencer Hosie expressed the complexity of a net tax system.
COMMISSIONER BUTCHER agreed and said he thinks about it every
single day. The net system puts the possibility of gaming in
place that probably doesn't exist to nearly the same extent in a
gross system (that deals with just price times production).
MR. TANGEMAN said the audit looks at what the expenses are, but
there is also a high penalty of 11 percent on the books now to
discourage gaming the system. He wouldn't apply comments in a
five-year old memo to what is being experienced today.
CO-CHAIR PASKVAN said they need to know not only what the state
gets for its credits but what it gets by allowing a deduction of
capital and operating expenditures in one year.
CO-CHAIR WAGONER went back to slide 3 that showed Alberta, North
Dakota and Texas booming and asked if any of them have a net tax
system.
COMMISSIONER BUTCHER replied no. In fact, Alberta makes almost
all of its revenue off of royalties.
CO-CHAIR WAGONER asked if any state in the United States have a
net tax system.
MR. TANGEMAN replied no. The net tax with credits is unique in
Alaska and it's the most complicated.
CO-CHAIR WAGONER asked if no one else has made a net system
work, why Alaska is continuing down this path. He working on the
PPT and the only reason they went to a net system was to get a
gasline.
COMMISSIONER BUTCHER said those are good questions.
4:44:14 PM
SENATOR STEDMAN said his understanding is that mostly North
America is on tax and royalties; the rest of the world is on
production sharing and concession systems. He asked the
department to take a broader view than just comparing Alaska to
other states in the Union and one province in Canada. It's a
much larger issue not only in the magnitude of the resources but
in their ownership. It's also misleading to the public to hear
comments like Alaska is the only anomaly on the planet.
MR. TANGEMAN responded the document they distributed a few days
ago called "Alaska's Oil and Gas Fiscal Regime" was their
attempt to start putting that discussion in perspective. It is a
first step to comparing oil producing regions from a
competitiveness perspective.
4:47:10 PM
SENATOR STEDMAN said he wasn't referring to that document, but
he was referring the comments comparing Alaska to other states.
The comparison should be broader than that. Alaska is the only
state in the Union that owns the subsurface rights in common.
That is a huge difference; we're the only state that has a
concession system like this. And Alaska is not abnormal in the
major oil basins around the world.
COMMISSIONER BUTCHER agreed.
SENATOR STEDMAN said he recognized the value of the document,
but he wanted people to recognize the conversation is going to
be broader than that.
MR. TANGEMAN added that they will build on the work done by
economists and contractors during PPT and ACES. They did a lot
of solid work.
4:49:27 PM
COMMISSIONER BUTCHER said the department agrees with most of the
study's findings; it showed a lot of the positives about the
implementation. It has given them a clear roadmap on how best to
proceed moving forward starting out with preparation for
procurement, to writing of the RFP, to preparing for the overall
project with an emphasis on project management et cetera. They
have also reached out to numerous states that have done this
recently to get their advice on what it actually means to
implement something this large. Another finding is trying not to
expedite a five-year project into 18 months, because that's
where errors are made.
4:51:10 PM
CO-CHAIR PASKVAN went to page 31 of the Fast Enterprise study
regarding returns that says "Some tax types have no system at
all including the oil and gas production tax." He asked if that
was accurate.
MS. BALES said that was a true statement as far as automated
systems go. The tax returns themselves are a manual system. Even
though they have electronic uploads of information that come in,
that information doesn't go into a database until an auditor
finds the data and pulls it into an excel spreadsheet and
manipulates it that way. Some automated systems for the monthly
economic reports, for instance, help them with forecasting area
rather than the audit area.
CO-CHAIR PASKVAN went to page 47 that said the Tax Division
"lost a lot of expertise" and asked him to comment.
COMMISSIONER BUTCHER responded that in one year one auditor with
31 years of experience retired in the last month. He said they
had done a very effective job of filling out a lot of the high
level positions that were empty when he came before the
committee before. They still have one audit master position yet
to be filled.
4:54:05 PM
MS. BALES added that the expertise loss has been in auditing.
They currently have a staff of 15 or 16 auditors; one has more
than 20 years of experience and the rest have less than six
years of experience. They had quite a few retirements.
COMMISSIONER BUTCHER added that like many different areas of
state government they end up being the training ground for
auditors that then move to much higher paying positions in the
private sector.
CO-CHAIR PASKVAN said it seems to follow up with what is set
forth on page 48 of the Fast Enterprise study, which in
conclusion said, "The word is out. Taxpayers know Alaska's tax
system is broken."
4:55:22 PM
COMMISSIONER BUTCHER agreed that companies are aware the
department is using an antiquated system. And they are looking
forward to being able to work with something that is easier to
work from on their side almost as much as we are on ours.
SENATOR WIELECHOWSKI asked how many documents auditors are
dealing with referencing 3(a) on page 31.
MS. BALES answered that going to a net tax system, both
operating and capital, opens up a whole new realm of data that
needs to be looked at including joint interest billings. One
auditor told her one report can actually be millions of lines of
data for one taxpayer for one tax year.
SENATOR WIELECHOWSKI said the state would start running into the
six-year statute of limitations from the initial documents on
April 1 and the electronic system won't be up and running for
several years and asked how we deal with the system between now
and when it is up and running.
COMMISSIONER BUTCHER replied they will continue doing things the
way they have been. Because they have switched from gross to net
they expect the process to speed up a little bit. Implementation
of over the 22 different tax types will take two to five years.
He couldn't promise that the oil and gas production tax would be
the first piece, but it will be done as early as possible.
CO-CHAIR PASKVAN asked for a "two-minute where are we at" in
terms of how audits and statute of limitations can be handled.
4:59:40 PM
MR. TANGEMAN replied that the presentation was meant to be brief
and a catch up of what has happened since the $34.7 million was
put into the capital budget last spring. A COTS has been
implemented in dozens of states in the nation and it seemed
having a third-party project manager was the best way to go. So,
they have two companies assisting as the project managers and
their biggest lift right now is putting the RFP together to
bring a vendor on board that will actually implement the COTS
system. The goal is to have that out in February and to select
the vendor by August 1, 2012. Then they start walking down this
road of phasing in the 22 systems 4 or 5 at a time.
CO-CHAIR PASKVAN asked where they are money-wise and if he will
need more people.
MR. TANGEMAN replied that would be the challenge for the next
two to five years. They are keeping the current systems going
and on a parallel track they are setting up a new system. Once a
vendor gets on board he could tell them more. Ideally, they will
be able to use contract help to assist keeping the antiquated
systems plugging along. They are happy with the funds, but he
anticipated using temporary contract assistance to keep the
systems going.
5:02:57 PM
CO-CHAIR PASKVAN thanked everyone for participating and
adjourned the Senate Resources Standing Committee at 5:02 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SEN RES Background_ Additional Document 2008 Train Wreck ___COTS Presentation - OMB Rev 4.pdf |
SRES 1/30/2012 3:30:00 PM |
|
| SEN RES Background_DOR_SHosie_Memo.pdf |
SRES 1/30/2012 3:30:00 PM |
|
| DOR_AK Comprehensive Plan and Feasibility Study FINAL-1 (2).pdf |
SRES 1/30/2012 3:30:00 PM |
|
| 12 01 30 SenRes Review of Comp Plan Feas Study.pdf |
SRES 1/30/2012 3:30:00 PM |
|
| 12 01 30 SenRes TRMS Update.pdf |
SRES 1/30/2012 3:30:00 PM |