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.