HOUSE BILL NO. 406 "An Act relating to municipal sales and use taxes involving air carriers; and providing for an effective date." Representative Foster noted that HB 406 was assigned to a subcommittee, on 2/24/94, consisting of Representative Foster as Chair and Representatives Grussendorf and Martin. He provided members with a proposed committee substitute, work draft 8-LS1599\E, dated 3/3/94 (copy on file). LARRY LABOLLE, STAFF, REPRESENTATIVE FOSTER explained that the committee substitute prohibits a municipality from levying or collecting a tax or fee on the transportation of individuals or goods unless provided for in U.S.C. App 1513(b). He explained that this section enumerates items that can be taxed, related to air commence. He observed that the retroactive effective date was removed from the committee substitute. He acknowledged that the committee substitute does not alleviate all of the concerns expressed by the City and Borough of Juneau and the Alaska Municipal League. In response to a question by Co-Chair Larson, Mr. Labolle clarified that items sold at the air terminal are subject to municipal taxes. He explained that the legislation refers to anyone traveling in air commerce. Federal regulation prevents additional taxes on air fares. Co-Chair MacLean asked for an explanation of U.S.C. App 1513 5 (b) and (e). Mr. Labolle observed that section (e) allows the implementation of a three dollar head tax at the airport of origin. He explained that section (b) encompasses property taxes, fuel flowage taxes, personal property used in business and other items not directly connected to the transportation of a person or freight. Representative Foster MOVED to ADOPT work draft 8-LS1599\E, dated 3/3/94. There being NO OBJECTION, it was so ordered. Representative Martin questioned if U.S.C. App 1513 (b) allows local governments to tax transportation to and from lodges and car rentals. Mr. Labolle stressed that local government's ability to tax is not being expanded or diminished by the legislation. ROBERT HALLFORD, NATIONAL AIR CARRIERS testified via the teleconference network from Anchorage, in support of CSHB 406 (FIN). He maintained that the legislation is not intended to prevent or preclude the state or municipalities which operate airports from continuing to tax the associated services connected to air transportation. He noted that landing fees, fuel flowage fees, or property rent will not be effected. He asserted that the legislation will clarify that taxation of air transportation is reserved for the federal government in exchange for the "overriding benefit of the public at large." Mr. Hallford noted that the federal government collects a ten percent excise tax on passenger fares and a six and a half percent transportation tax on all air cargo. He asserted that case law supports the proposition that no additional taxes are allowed on air transportation of persons or freight. He maintained that the legislation will clarify federal law in order to prevent litigation by municipalities wishing to impose taxes on the transportation of property and people within the state. He suggested that references to subsections (b) and (e) are redundant. He pointed out that these sections pertain to matters other than the sale of air transportation. He asserted that the legislation will not hinder municipalities from collecting allowable taxes. JOHN HARTLE, ASSISTANT CITY ATTORNEY, CITY AND BOROUGH OF JUNEAU (CBJ) testified in opposition to CSHB 406 (FIN). He stressed that there is an unfunded mandate for municipalities to provide services to air carriers without the ability to collect taxes. He acknowledged that the legislation will prevent sales tax on transportation and goods through hub communities. He conceded that the committee substitute improves the legislation. He expressed concern that landing fees not be impacted by the 6 legislation. He suggested that the addition of "air" before "transportation" would further clarify the legislation. In response to a question by Co-Chair Larson, Mr. Hartle elucidated that landing fees would not be impacted by the committee substitute. Representative Hanley asked for further clarification of the City and Borough of Juneau's position. Mr. Hartle elaborated that federal law is unclear in regards to the taxation of the transportation of property. The City and Borough of Juneau believes municipalities should be free to challenge the federal interpretation of taxation of freight. He observed that freight could not be taxed if the legislation is adopted. He added that taxation would be precluded on the service of transporting property. Representative Martin MOVED to insert "air" before "transportation" on line 10, page 1. Representative Parnell restated that the amendment would exclude ground transportation. Mr. Hartle agreed that ground transportation would be excluded. He added that the legislative history is clear that the intent of the legislation is to prohibit sales tax on the carriage of goods. There being NO OBJECTION, AMENDMENT 1 was adopted. Representative Parnell clarified that "App" on page 1, line 12 refers to the appendix to the U.S. code. REED STOOPS, ALASKA AIR CARRIERS ASSOCIATION spoke in support of CSHB 406(FIN). He pointed out that air carriers pay a 10 ten percent federal excise tax on passenger fares and a six and a quarter percent federal excise tax on all air cargo. This tax goes to the federal Airport and Airways Trust Fund. He noted that the state of Alaska receives more than it contributes into the Fund. He suggested that a letter of intent be adopted to further define the legislative intent. CRYSTAL SMITH, DIRECTOR OF MEMBER SERVICE, ALASKA MUNICIPAL LEAGUE spoke in opposition of CSHB 406 (FIN). She reiterated that federal law pertaining to the transportation of goods is not well defined. She asserted that the transportation of intrastate freight is not exempted from taxation. She noted that St. Marys has attempted to add their municipal sales tax to the transportation of fish from St. Marys to Anchorage. They would collect approximately $100.0 thousand dollars a year if the sales tax was added. She alleged that there is no existing state case law regarding intrastate taxation of air freight. 7 Ms. Smith referred to an opinion by the Department of Transportation and Public Facilities, Deputy General Counsel that states that federal law does not preempt intrastate taxation. She referenced a preliminary opinion by Judge Lincoln in Homer. Judge Lincoln ruled that municipalities may place a tax on non certificated air carriers. Ms. Smith recognized that the committee substitute did address some of the concerns expressed by the Alaska Municipal League. Mr. Hallford noted that the letter referenced by Ms. Smith from the Department of Transportation and Public Facilities is dated 1986. He observed that the United States Supreme Court ruled in 1992 that the preemption provision was intended by Congress to have a broad effect. He clarified that the preemption provision is contained in U.S.C. 1305. He cited the supreme court decision Morelis vs Transworld airlines. He suggested that the exception for intrastate transportation was made clearer by the decision. He asserted that intrastate transportation can be interstate commerce. Representative Martin MOVED to insert "air" before "transportation" on page 1, line 1. Representative Brown asked how flight seeing services would be effected. Mr. Hartle replied that sales taxes on flight seeing services would be prohibited by the legislation. He added that CBJ has considered assessing a sales tax on flight seeing tours that operate in Juneau. He emphasized that the state has reduced aide to municipalities and is cutting into the municipal tax base in statute. Representative Hanley noted that Judge Lincoln's decision found that the air taxi service in Homer was a non certificated air carrier and could be taxed by the municipality of Homer. Mr. Hartle observed that all commercial aviators carrying passengers have some federal certificate. He felt that the broad language contained in CSHB 406 (FIN) would prevent the taxation desired by CBJ on sight seeing air transportation. Mr. Hartle clarified that the confusion regarding the taxable status of air freight is contained in section (a) of U.S.C. APP 1513. He maintained that reference to section (b) would not create further confusion. Representative Foster MOVED to report CSHB 406 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. 8 CSHB 406 (FIN) was reported out of Committee with "no recommendation" and with three zero fiscal notes, one by the Department of Community and Regional Affairs, published 2/15/94 one by the Department of Revenue, published 2/15/94, and with a zero fiscal note by the Department of Transportation and Public Facilities; and a municipal fiscal impact note by the Department of Community and Regional Affairs on behalf of municipalities.