HOUSE BILL 362 "An Act extending the motor fuel tax exemption for fuel sold for use in jet propulsion aircraft to fuel used in those aircraft for flights that continue from a foreign country." 6 Commissioner Perkins provided an update on the issues which were left outstanding from the previous meeting regarding the proposed legislation. The first issue concerns the management of the Foreign Trade Zone (FTZ) in Anchorage. The Municipality of Anchorage and the State of Alaska committed to a meeting to discuss the State's involvement in management issues related to State land in the FTZ. The meeting did occur and agreement was reached that the State would be included in any decision on the FTZ. Details remain to be worked out relative to the existing use of the FTZ. He provided a letter from Mayor Rick Mystrom regarding the Anchorage FTZ. [Copy on file]. The second concern addressed the availability of Custom Bonded Warehousing for the storage of AvJet fuel. That issue has been researched thoroughly, concluding that in the State's ability to tax, there would be no practical difference. He noted that either one, an FTZ or a Custom Bonded Warehouse could be used for the purpose that FTZ is used today. However, it would also clarify that a Custom Bonded Warehouse would have disadvantages that are not present with an FTZ. In a Custom Bonded Warehouse, goods must be segregated from the moment they enter the warehouse until they leave. For an FTZ, there is no such requirement. JEFF COOK, (TESTIFIED VIA TELECONFERENCE), VICE-PRESIDENT, EXTERNAL AFFAIRS & ADMINISTRATION, MAPCO PETROLEUM, ANCHORAGE, stated that the only way to provide the in-state refineries protection would be through passage of HB 362. He pointed out that Fed Ex has testified that they intend to use bonded fuel. (Tape Change, HFC 96-84, Side 1). Mr. Cook reiterated MAPCO's position of support for HB 362 which he thought would "level the playing field". In response to Representative Navarre's question, Mr. Cook stated that bonded fuel has been available since the 1930's. Representative Navarre asked if it had always been exempt from the tax, and if so why had it not eliminated the demand from the market. Mr. Cook admitted that he was not qualified to answer that query, although reiterated that Alaska does not refine enough jet fuel for the demand. Representative Navarre suggested that in-state refiners might already have a competitive advantage. He requested information on the current MAPCO profit margin. Mr. Cook stated that MAPCO competes against other refiners and was not willing to lay out their costs. He assured Committee members that shipping costs through the FTZ were cheaper 7 than what local refiners pay to ship via the Alaska Railroad from Fairbanks. Representative Navarre maintained that bonded fuel has been available and has not yet glutted the market. He believed that would not happen, emphasizing that the 3.2 cents charged by the State is not the only factor in the equation. Representative Navarre emphasized that enough information is not available to make the decision recommended. Mr. Cook agreed that the tax is not the only variable. Business has become much more competitive and the airlines definitely have interest in saving money. He emphasized that in the fourth quarter, 1995, 20 million gallons of jet fuel did come into the Alaskan market. He urged that the tax advantage for the foreign refined fuel be eliminated. Discussion continued between Representative Navarre and Mr. Cook. Representative Navarre questioned the two cent per gallon flowage fee lifted at the airport. He asked if that was a charge on all fuel pumped at the airport. KURT PARKAN, DEPUTY COMMISSIONER, OFFICE OF THE COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES (DOTPF), stated that the fuel flowage fee circulates back into the enterprise fund at the airport. Most of that is collected through an operating agreement with the air carriers. That agreement is based on a five year operating agreement during which time, the fuel flowage fees can not be increased. The fuel users within the FTZ are nearly all members of the operating agreement. Members discussed the concept of profit margin. Representative Therriault spoke to the advantages and disadvantages among private sector in determining the profit margin. Co-Chair Hanley inquired if fuel that came into Alaska had displaced any Alaska refined product. Representative Navarre suggested that it had been a balancing influence in the competitive market. Commissioner Perkins stated that DOTPF wants to "level the playing field", although he felt that enough information indicating that it was not currently level, is not available. The Department plans to proceed to work with the Municipality of Anchorage addressing the FTZ portion of the legislation. The bonding concerns should be addressed at a later date. Co-Chair Hanley asked if new facilities would need to be built for bonded fuel. Commissioner Perkins advised that the current set-up could be used, although it can not be mixed in the tanks. He added, bonded fuel did come into 8 Alaska in 1971, which was the only bonded fuel to come into Alaska until the tanker last year. He did not know of any tankers which were scheduled to come back into Alaska. Discussion followed between Representative Kelly and Commissioner Perkins as to the definition of a "level playing field". Commissioner Perkins noted that there were many considerations which would create a level playing field including the cost of transportation and the cost of product. The deciding factor is whether a business can compete and make a profit. Representative Kelly reiterated that it was not "fair" that in the free market place, one business was required to pay over and above the other, a 3.2 cent tax. Representative Navarre advised that the tax was not the only thing making the playing field not level. He stressed that it has not been proven that the bonded fuel is crippling the in-state refiners. Commissioner Perkins asked if there had been to date, enough impact on industry to remove the 3.2 cent tax, eliminating that revenue source for the State of Alaska. He noted that the Department supports in-state producers and would guarantee that if there was a lot of fuel arriving at the Anchorage harbors, the Department would then suggest that the tax be removed. Co-Chair Hanley agreed that the State would lose revenue with the removal of the tax. JACK BURMINGHAM, (TESTIFIED VIA TELECONFERENCE), ALASKA AIR CARRIERS ASSOCIATION, ANCHORAGE, testified that airlines were the ones required to pay the aviation fuel tax, not the refiners. To the extend that there is an unlevel playing field, he noted that some airlines do not pay the fuel tax and are competing with those airlines that do. He stated that there has not been specific justification for the tax give-a-way for bonded fuel. PAMELA LABOLLE, PRESIDENT, ALASKA STATE CHAMBER OF COMMERCE, JUNEAU, spoke in support of HB 362. Under present circumstances, Alaskan business' are being put at a disadvantage. She recommended the State goals be: 1. Value added resources; and 2. Economic development. Co-Chair Hanley asked if bonded fuel could be taxed. NEIL SLOTNICK, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, noted that he had checked if state tax would be preempted by federal law. There is no statute that explicitly preempts state taxation, which then leaves the State in determining if state taxation is implicitly preempted. He thought that arguments could be made on both 9 sides. The taxpayers are likely to argue that there are two cases before the U.S. Supreme Court that control that issue. The commissioner of the Department of Revenue has considered all the information, including weighing the risks of litigation costs, and has determined that it would not be in the State's best interest to assess state taxes against bonded fuel. (Tape Change, HFC 96-84, Side 2). M. CLYDE STOLZFUS, SPECIAL ASSISTANT, OFFICE OF THE COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES, responded to Co-Chair Hanley's question regarding other states which tax bonded fuel. He advised that there are other jurisdictions that tax bonded fuel, although the type of taxes vary. The existence of a FTZ does not in itself, exempt taxation. Co-Chair Hanley asked if some states are taxing the fuel, why doesn't Alaska. Mr. Stolzfus responded that the situation was not fuel related. It was "other" commodities within a FTZ. Mr. Slotnick added, the difference was not in the commodities, but rather the type of tax. There are some "privilege" taxes that have been allowed on exempt commodities which are in a FTZ. Representative Kelly suggested the possibility of offering a rebate given to the local producers based on the amount that is actually brought into the State. Mr. Bartholomew stated that consideration could be a possibility. Perhaps an exemption of every gallon coming into the State of that used in excess of the capacity of the local producers. RANDY WELKER, LEGISLATIVE AUDITOR, LEGISLATIVE AUDIT DIVISION, commented that federal regulations that govern the FTZ consists of a governing board. The regulations do provide that the board, if given good cause, can exclude certain goods or property from the FTZ. He stated that there is a possibility that a resolution submitted to that Foreign Trade Zone Board could encourage the exemption of fuel from that zone. If that should occur, the fuel coming in could be taxed, which would only address that FTZ fuel and not the bonded fuel. RICHARD CURTIN, GENERAL COUNSEL, PETRO STAR, ANCHORAGE, testified that Petro Star owns the only Alaskan refinery and the smallest refinery in the State. He stressed that once the tankers are in route, it will be too late for in-state refiners. The impact will cause some refineries to go out of business. He concluded that the purchasers of jet fuel have indicated that they intend to move to bonded fuel. 10 HB 362 was HELD in Committee for further consideration.