HOUSE BILL NO. 239 "An Act relating to the liability of motor fuel dealers for payment of tax imposed on certain credit transactions involving motor fuel sales or transfers that become worthless debts or on sales or transfers to persons who declare bankruptcy; and providing for an effective date." REPREESNTATIVE GARY DAVIS explained that the Alaska motor fuel tax is an excise tax designed to be paid by the consumer or user of the fuel. For administrative reasons, state law requires the tax to be collected and paid by the motor fuel wholesaler at the time the fuel is sold or transferred. As a practical matter, the transaction often occurs at the wholesale level with businesses that subsequently resell the fuel to the consumer or user of the fuel. Representative G. Davis continued, in commercial transactions of this nature, it is customary to extend reasonable credit terms that may result in a deferral or delay in the collection of both the debt and the motor fuel tax by the dealer. In some cases, the debt may become wholly or partially worthless because of a bankruptcy filing. HB 239 would allow motor fuel dealers in these cases to receive a nonrefundable credit in an amount equal to the tax previously remitted to the State. The credit would only be applied against subsequent tax liabilities, and could only be taken for sales with a total tax liability of $500 or more. The language specifies that dealers may only apply for a bad debt credit by filing written proof of the bankruptcy petition, or after reporting the debt as worthless on the dealer's federal income tax return. Representative Gary Davis summarized that HB 239 would include a provision requiring repayment of the tax if the account or debt was subsequently repaid, with partial payments to be handled on a proportional or pro rata basis. Co-Chair Therriault questioned the need for the "findings" section. Representative G. Davis replied that section indicates the process that the State must go through to put the situation in place. He agreed that section could be deleted. Representative J. Davies recommended that the effective date of the legislation must be changed. Representative G. Davis agreed. Co-Chair Therriault noted that would occur in the new committee substitute. Representative Grussendorf emphasized the need of establishing "other" revenue streams if the State continues to give "breaks" to industry. Representative G. Davis believed that $500 dollars tax owed, at eight cents a gallon would be an equitable threshold. Co-Chair Therriault pointed out that the tax would be written off and that the refiner would take the "big hit". BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE TAX DIVISION, DEPARTMENT OF REVENUE, spoke to the Department of Revenues (DOR) considerations with the proposed legislation. Last year, when the Department went through the process to change the motor fuel forms to increase the compliance effort of the State, the forms were changed and additional information was collected from the industry. At that time, the industry brought up issues that they had with businesses not paying their debts. DOR agreed to look into it, and then discuss it internally as a policy issue. At that time, other states were contacted regarding the manner in which they addressed this concern. The Commissioner believed that this was a reasonable tax from an equity standpoint. Mr. Bartholomew advised that the Division had established "guardrails" as to who would have the authority, which then lead to focusing on several sections of the bill: ? 1st - Going into bankruptcy and meeting the court test for not having the financial assets to meet the debts; ? 2nd - Meeting the IRS guidelines for writing off a worthless debt. He continued, one of those criteria must be met to be eligible for the credit. The Division also has asked for a bottom threshold. Other states recommended that there be language to keep the small transactions out, consequently, a limit was established. Mr. Bartholomew continued, no cash refund would be given. If a credit were claimed, it would come from a future tax liability. The fiscal note is based on 1/10th of 1% of the total sales or revenue coming into the State. The State currently collects about $40 million dollars a year in motor fuel revenues. Representative Grussendorf asked if when the dealer buys the gasoline in bulk, if he would have to pay the federal tax on it. Mr. Bartholomew understood that the federal tax was collected "further upstream" and that the manufacturer or the distributor would have paid it. Co-Chair Therriault questioned if motor fuel tax would include marine fuel and highway fuel. Mr. Bartholomew stated it would and applied to all motor fuel taxes under Title 43, aviation, marine and highway. Representative G. Davis pointed out that other states have this in place, although, it is not used often. He reminded members that other states do not have the seasonal industry that Alaska does, which would make this legislation more advantageous here. Co-Chair Therriault referenced language proposed in the amendment, which considers the total transaction. Mr. Bartholomew understood that a typical tanker load would be limited to one transaction and subject to the $500 dollar limit. He acknowledged that it would be a rare occasion when a customer with one shipment payment late would be cut off. Usually the second or third shipment is where the line would be drawn. Limiting it to single transaction would not help. He believed that the transaction could work given the other stipulations contained in the bill. Co-Chair Therriault reiterated that no transaction would be allowed once it was known that the business was bankrupt or unwilling to pay the debt. Co-Chair Therriault suggested that if a company was going bankrupt, it would be prudent for the distributor to get a letter of credit, rather than continue building that potential debt. Mr. Bartholomew commented, some business would attempt to get some type of security. If there was a recovery by the company, they would then have to reimburse the State for a portion of the credit, and that would be prorated. Representative Grussendorf asked if the company applying for the credit would have to submit their IRS statements to the State. Mr. Bartholomew replied that the Division would require documentation of the bankruptcy files as a part of the credit support. MARK HICKEY, REPRESENTING - PETRO MARINE SERVICES, JUNEAU, spoke in support of HB 239. He stated that the bill would allow fuel dealers to receive a nonrefundable credit for fuel taxes paid to the State for fuel sold on credit, but not paid by purchasers, who had declared bankruptcy or rendered their debt worthless. The bill would allow motor fuel dealers to receive a nonrefundable credit in an amount equal to the tax previously remitted to the State. The credit would be applied against subsequent tax liabilities only, and could be taken for sales with a total tax liability of $500 dollars or more. The legislation specified that dealers may only apply for a bad debt credit by filing written proof of the bankruptcy petition or reporting on the dealer's federal income tax return that debts are worthless. Mr. Hickey commented that Alaska Petro Marine Services believes that HB 239 would provide a more fair and equitable adjustment to current law. The company supports the amendment. Mr. Hickey pointed out the technical problem on Page 3, Section (f), regarding protection. Current language could be interpreted that this not apply to the transaction. He recommended that Line 22 be worded: "This section does not apply to a credit transaction by" and keeping the remaining language. He suggested, on Line 27 to insert "a" and delete "the". Co-Chair Therriault spoke to Section (e), Page 3, Line 19, in reference to the three-year period. Mr. Hickey understood that language clarified that once a company has a credit with an individual customer, they would not be able to again apply when they ceased to pay the debt. HB 239 was HELD in Committee for further consideration. (Tape Change HFC 98- 42, Side 1).