HOUSE BILL NO. 303 "An Act relating to the levy and collection of a sales tax; and providing for an effective date." Co-Chair Mulder MOVED to ADOPT proposed committee substitute work draft, 22LS1206\T, Kurtz, 3/22/02 (copy on file). There being NO OBJECTION, it was so ordered. DENNY DEWITT, STAFF, REPRESENTATIVE ELDON MULDER reviewed the committee substitute. He noted that the legislation would bring a sales tax before the Committee. He reviewed the primary issues discussed by the subcommittee. The first issue was preemption. The legislation would preempt local government from charging a different sales tax from the state. Local governments could add a local tax using the guidelines of the bill, which would be collected by the state at no charge to the municipality. There would one type of sales tax, one set of exemptions, and local governments could decide if they wanted to add a percentage to the state tax. Businesses that collect the tax and remit it to the state appropriately, within the appropriate timeframe, would keep one percent of the amount collected as a fee for the collection process. Representative Davies summarized that the legislation would require any local entity to use the exemption structure contained in the bill. Mr. DeWitt noted that local options for special taxes in Title 29 would not be affected: including bed taxes. Mr. DeWitt reviewed the legislation by section. Section 1 assists boroughs with their taxes. Establishes the initial sales tax and eliminates the collection portion, which would shift to the state. Sections 2 and 3 confirm privacy at the state level. Section 4 is the assessment and collection of taxation. Section 5 allows a borough to levy a general sales tax on goods and services consistent with the state. Section 6 allows cities the same opportunity. Section 7 begins the collection of the sales tax and authorizes the state to collect on behalf of the municipality. Section 8 begins the sales and use tax. This provision is needed in order to access the use tax through Internet sales. The use tax follows the sales tax and is consistent. There are several areas that would need technical amendments to be recommended by the Department of Revenue. Mr. DeWitt reviewed technical amendments. On page 3, line 3: delete "in the state." He noted the state already has the ability to levy the tax. Subsections (b) and (c) are rewritten to replace "tangible personal property" with "goods or use of real property". He explained that language would provide consistency. Mr. DeWitt noted that subsection (2) on page 3, line 26 - 27 would be amended: "real property" and "and transportation" would be removed. "Property" on line 27 would be changed to "goods". LORI BACKES, STAFF, REPRESENTATIVE WHITAKER, explained that the intent is to allow an exemption for services that are performed in the act of creating a component of a product for resale. TAPE HFC 02 - 63, Side A  Representative Lancaster clarified that plumbing installed in a house being built would not be taxed because the house would be taxed when sold. Representative Hudson questioned if house components would be subject to the sales tax. Co- Chair Mulder explained that only the finished product would be taxed. Mr. DeWitt noted that there is a specific section regarding construction. Mr. DeWitt reviewed exemptions under section 43.44.020 and observed that they attempted to include all educational institutions were included. (1) goods sold, real property sold, rents, or services performed that are (A) explicitly exempted from taxation under another provision of state law; or (B) exempt from taxation under federal law, including sales to the federal government, and purchases made with (i) food coupons, food stamps, or other types of certificates issued under 7 U.S.C. 2011 - 2036 (Food Stamp Act); and (ii) food instruments, food vouchers, or other types of certificates issued under 42 U.S.C. 1786 (special supplemental nutrition program for women, infants, and children); (2) sales of goods, real property, or services for resale, including the sale and transportation of property that are used in connection with or will become an ingredient or component part of goods manufactured, processed, or fabricated for resale; (3) electricity, natural gas, water and sewer utility services, and fuel for heating or electrical generation; (4) funeral, cemetery, and crematory goods and services; (5) health care services provided by a person licensed or certified to provide those services under AS 08, by a public home care provider as that term is defined in AS 47.05.017(c), by a health care facility operating under a certificate of need issued under AS 18.07, by a hospital licensed under AS 18.20, or by an assisted living home licensed under AS 47.33; (6) prescription drugs, devices, and supplies prescribed by a person licensed to prescribe those goods under AS 08; (7) interest earned or paid by banks. savings and loan associations, credit unions, and investment banks, and the following sales and services provided by banks, brokerage firms, savings and loan associations, credit unions, and investment banks: (A) services associated with any deposit accounts, including service fees, insufficient funds fees, and attachment fees; (B) fees for the purchase of bank checks, money orders, traveler's checks, and similar products for payment; (C) loan fees and points associated with loan transactions; (D) pass-through charges on loan transactions that include sales tax; (E) services associated with the sale, exchange, or transfer of currency, stocks, bonds, and other securities; (8) sales by federal, state, or local government entities; (9) wages, salaries, commissions, and any other form of remuneration paid to employees for personal services; (10) educational services provided by a non-exempt or exempt religious or other private school reporting to the commissioner of education and early development under AS 14.45.030 or 14.45.110(b) or by a postsecondary educational institution authorized to operate under AS 14.48; (11) refined petroleum products taxed under AS 43.40; (12) real estate rentals of 30 consecutive days or more; (13) construction services; (14) admission to museums and historic sites; (15) sales made to an entity described in 26 U.S.C. 501(c)(3) (Internal Revenue Code) and exempt from federal income tax under 26 U.S.C. 501(a); (16) sales made by an entity described in 26 U.S.C. 501(c)(3) (Internal Revenue Code) and exempt from federal income tax under 26 U.S.C. 501(a) if the income from the sale is exempt from federal income taxation; (17) casual and isolated sales or rentals by a seller who does not regularly engage in the business of selling goods or services, or making rentals, but only if (A) the total sales do not exceed $1,000 a year and the sales of goods do not occur for more than 14 days in a calendar year; or (B) the sales of goods are made by a licensed business to sell business equipment used in the business and not held as inventory; (18) sales of insurance and bonds of guaranty and fidelity, and commissions on those sales. Mr. Dewitt recommended that brokerage firms be added to the subsection 7 exemptions. He also recommended that subsections (A) - (E) include a subsection (F): interest earned and paid. It was the intent of the subcommittee that subsection (8) refer to sales and purchases. In subsection (10) definitions were used to recognize all schools that could generally be brought under the rubric, in terms of K- 12. Postsecondary schools operate under AS 14.48. Refined petroleum products that are currently taxed would not be subject to the sales tax, such as aviation and marine fuel taxes. Short-term hotel rentals would be exempted. They would be available to be taxed on a bed tax basis with local governments. Representative John Davies questioned how the provision would affect contracts with tour groups, which block off hotel rooms for a season. Mr. Dewitt thought that they would be under the less than 30-day provision, since they are eventually rented to individuals. Co-Chair Mulder acknowledged that it is the intent of the subcommittee to include blocks of rooms under the 30-day provision. Mr. Dewitt observed that subsection (15) applies to sales made to a non-profit entity. Subsection (16) applies to sales made by the non-profit entity, which would apply to the sale of Girl Scout cookies and other fund raising activities. The purchase and sale of Girl Scout cookies and other fund raising items by churches and other non-profits would be exempted. Mr. Dewitt noted that garage sales would be exempted under subsection (17), unless the gross would exceed $1,000 dollars a year. Representative Hudson questioned if arts and craft shows at malls would be included in the exemption. Co- Chair Mulder responded that if they are a weekly event it would not be a causal sale and they would be subject to the sales tax. The provision is for causal sales: the occasional sale. Non-profits would be excluded. Representative Lancaster questioned if a certificate would be needed to collect the tax. Ms. Backes stated that a certificate would not be required to collect the tax, but a certificate would be required for exempt groups. Mr. Dewitt noted that Sec. 43.44.030 (a) limits the sales and use taxes levied under AS 43.44.010 to the first $2,000 dollars of each separate sale, rent, or service transaction, or a maximum tax of $60 dollars. Mr. Dewitt continued his review of the legislation. Subsection (b) discusses taxation of long-term personal property leases. Subsection (c) deals with transactions involving payment of services rendered or delivered over time, such as an accountant billed on a monthly basis. Subsection (d) addresses services on account or billed on a monthly purchase. The most recently billed or monthly process would be used. Subsection (e) provides that each night's rental would be a separate transaction. Subsection (f) addresses long-term property leases, such as automobile leases. Mr. Dewitt explained that the seller would collect the tax and remit it to the department. The seller would be allowed to keep one percent of the collections as long as they remit in a timely fashion with completed forms. Exemptions are given for coin operated devises, food and beverage at concession stands, bars, movable vendor carts, metered sales. He observed that the intent is to add taxis that use a metering devise to the list. Taxis that charge by zone could include the tax. Vice-Chair Bunde questioned why the total price could not include the tax. Mr. Dewitt agreed that the ticket price would include the tax. In response to a question by Vice-Chair Bunde, Ms. Backes explained that people want to see how much the tax is and if it is included in the sales price it wouldn't show up as a separate item on the invoice or receipts. LARRY PERSILY, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE explained that the department thinks that consumers should know how the price breaks down. Most states require that the sales tax be shown, so that businesses cannot use it as an unfair advantage. Mr. Dewitt reviewed the use tax provision. The use tax for items brought into the state would be the same as if the item was purchased in the state. Proceeds would be deposited into the General Fund and a certificate of exemption would be issued to those that are exempt from the sales tax. Nexus language allows the state to tax companies using Internet or mail order sales that have a presence in the state. Mr. Dewitt noted that "or use" needed to be added to page 7, line 12. He added that language in subsection (b) would be amended in order to tighten it up. The effective date is January 1, 2003. Representative Lancaster questioned how Sec. 43.44.070 would be implemented. Mr. Persily explained that a contractor would have to show a resale certificate to the building supply store when buying lumber. Representative Lancaster questioned how persons would know that the seller has the authority to collect the tax. Representative Whitaker clarified that the business license would give them the authority to collect the tax. Representative Hudson asked if the state of Alaska has an agreement with Seattle regarding collection of tax from Alaskan residents. Mr. Persily explained that Seattle put the exemption in their tax code to promote business. There is no nexus. Someone from Seattle would have to pay the tax if it were implemented in Alaska. Representative Hudson observed that there are a variety of municipal sales tax exemptions such as for senior citizens. He questioned if local exemptions would be permitted on the city sales tax assessments. Mr. Dewitt responded that they would not. The senior citizen property tax would not be covered in the statute. The city of Juneau could issue checks to seniors that would cover the cost of their property tax. Other communities such as Wrangle utilize this provision. Representative Hudson observed that there is concern with the uniformity of state law. Representative Whitaker spoke in support of state primacy manifested through preemption. It would allow continuity of business throughout the state of Alaska and nation. Ms. Backes added that the legislation requires the state to collect the sales tax for the municipalities, so there may be savings to the municipalities on the collection. Co-Chair Mulder clarified that business would retain 1% of the tax collected. Representative Hudson discussed the local taxation process and questioned if the municipal tax amount would be limited. Mr. Persily clarified that the state would collect the amount indicated by the municipality. There is no restriction on seasonal amounts. He assumed that municipal payments would be made monthly. Co-Chair Mulder observed that it does not make sense for small vendors to send their checks in every month. Mr. Persily observed that taxpayers that make a certain amount could be required to pay quarterly and those making more than the threshold could pay monthly. He recommended that the legislature set a threshold at $500 - $1,000 dollars. He cautioned that businesses in trouble might be tempted to utilize the tax sales. Penalties are already included in the tax code. Representative Lancaster questioned how exemptions or special collections would be negotiated within the municipality or borough. Mr. Persily replied that it is the intent that municipalities with bed, fuel, alcohol, fish or other taxes, would collect, enforce and deal with those taxes on their own. The legislation applies only to general retail sales and use tax. In response to a question by Representative Lancaster, Representative Whitaker discussed the amount of tax that would be collected. He explained that there are different models. The Department of Revenue uses a 1997 model, which is not as sophisticated as desired. The Department of Revenue model estimates between $250 and $400 million dollars. The Legislative Finance Division's model estimates $198 million (consumer) dollars. He concluded that the tax would derive between $250 and $400 million dollars. Mr. Persily amended the Department of Revenue's estimate to $240 - $300 million dollars. Representative Lancaster asked about the set-up costs. Mr. Persily estimated operating costs, after the initial set up, at $4.9 million dollars. He stated that a fiscal note would be provided. Representative John Davies asked the capital costs. Mr. Persily explained that the capital cost would be $1.75 - $2 million dollars. Much of the cost would be for computer programming. The goal would be to set something up for electronic filing. Representative Hudson asked for product values of 1-2-3% tax ranges. Co-Chair Mulder thought that a 1% tax would generate between $70 and $125 million dollars. Each additional percent would generate about $100 million dollars. Representative Lancaster asked about bed and rent tax. Mr. Persily replied that no community would be able to collect sales tax on rent. Representative Lancaster questioned if a special tax could be applied on a local level. Ms. Backes agreed that the intent of the legislation is to allow local taxation. Representative Hudson observed that rent is anything over 30 days. Representative Lancaster asked if the point of service delivery was addressed. Ms. Backes clarified that tour operators would not be tax-exempt. Representative Carl Moses voiced concern with not including the sales tax in the price structure. Co-Chair Mulder observed that the "unfair competition clause" could apply if some businesses included the sales tax and others did not. Representative Carl Moses responded that if the tax were included, the person would be at a disadvantage. Representative Lancaster stressed that disclosure would be the issue. Discussion ensued regarding inclusion of the tax [in the price structure]. Representative Whitaker reiterated that the limitation would be up to $2,000 dollars. He emphasized that the legislation needs to be consistent. Co-Chair Mulder agreed. Mr. Persily added that a problem would occur if the separation of tax were not disclosed. The sales tax needs to be disclosed, which may not be practical. Representative Lancaster recommended issuing a certification with the rules and regulations. Vice-Chair Bunde asked the enforcement mechanism. Mr. Persily commented that the department would be using business licenses. He emphasized the need for sufficient budget support for audit work. Representative Lancaster noted that the fiscal note could be increased if the Committee wants more enforcement. Representative Carl Moses observed that if the tax and sales price is included, it could be backed into the worksheet. Representative John Davies asked if there were any reason that a price, which included the sales tax could not be reported separately in the receipt. Mr. Persily pointed out that the tax would have to be backed out for tax-exempt purchases. TAPE HFC 02 - 63, Side B  Representative Carl Moses maintained that merchants need to have records of tax-exempt products sold. Vice-Chair Bunde spoke in support of allowing inclusion of the tax within a sales price. Representative John Davies requested a spreadsheet to indicate the expected revenue by the Division of Legislative Finance. Co-Chair Mulder responded that there would be a fiscal note. HB 303 was heard and HELD in Committee for further consideration.