HOUSE BILL NO. 314 "An Act relating to the application of the passenger vehicle rental tax; and providing for an effective date." 8:46:01 AM REPRESENTATIVE THOMPSON, SPONSOR, introduced HB 314. He recounted that the legislature passed the rental vehicle tax in 2003 in order to help offset the costs for road repair and maintenance. Since passage of the legislation, the statute was amended three times due to the law's impact on Alaskans. He indicated that the bill clarified that the tax only applied to passenger recreational vehicles as defined in AS 43.52.010. JANE PIERSON, STAFF, REPRESENTATIVE THOMPSON, provided a sectional analysis of the current transportation version of the bill: (1) Section 1 Amends AS 43.52.010 and consolidates two existing sections, regarding the terms "recreational" and "passenger" into one section. Except for the tax rates, the factors are the same for both types of vehicles. (2) Section 2 Amends AS 43.52.010 by reducing the term from 90 days to 28 days, for which a lease or rental is exempt from the rental vehicle tax. It also clarifies that all renewals and extensions of a vehicle lease are included when determining if a lease is more than 28 days and, therefore, exempt from the rental vehicle tax, as long as no time has lapsed between the initial end date and the period of extension. Ms. Pierson noted that the changes aligned with the current contracts used by rental companies and that most visitors rent cars for less than twenty-eight days. (3) Section 3 Amends AS 43.52.020 to again consolidate the terms "recreational" and "passenger" to better organize the statute. This section clearly states that passenger vehicles are taxed at 10% and recreational vehicles are taxed at 3%. (4) Section 4 Repeals AS 43.52.030 and AS 43.52.040 because they are no longer needed due to the changes made in Sections 1 and 3 together. (5) Section 5 Provides for an immediate effective date. Ms. Pierson furthered that two sections were removed from the current version. One section decreased the gross vehicle weight from 8,500 pounds to 6,500 pounds. The change increased the fiscal note because light weight pick- up trucks and some models of sport utility vehicles (SUV) fell into the weight class and were rented as passenger cars. She added that another change pertained to reducing the rental term from 90 days to 28 days. Some business vehicles were leased along with heavy equipment used on the North Slope or for mining and weren't driven on public roads. Decreasing the lease period excluded the vehicles involved in business to business leases. She noted that the provisions were supported in written testimony. Representative Holmes recalled that last year the legislature dealt with the tax on leased motorcycles. She asked whether the bill affected leased motorcycles. Ms. Pierson replied in the negative. Representative Gara stated that he liked the legislation and understood the purpose of the bill. He supported addressing the problem for vehicle rentals between Alaska business to Alaska business and the language regarding recreational and passenger vehicles. He cited page 1, line 12: (1) the initial lease or rental contract is for a period of 28 days or more; Representative Gara deemed that 28 days was not the appropriate alternative to solve the problem. He indicated that many Alaska visitors came for longer than 28 days and should pay the tax. He suggested crafting different language that applied an exemption if the rental was for the purposes of work with another Alaska business and not for recreational purposes. Ms. Pierson replied that the twenty-eight day time period was chosen because it was the shortest amount of days in a month and the shortest term of a commercial lease. She stated that the bill had "gone through multiple iterations." She shared a brief summation of the issue. She cited a letter from British Petroleum (BP) (copy on file). She cautioned that a criminal investigation was underway around the issue which created ethical challenges during discussions of the legislation. The business rental vehicles were not driven on state maintained or public roads but were being taxed. The situation was problematic for the Department of Revenue (DOR) because they did not have a way to determine the end use of the lease. Industry was receiving tax notices for the rentals. She was unaware of companies that collected the tax, and did not submit the revenue to the state, but if the scenario happened criminal charges should ensue. She discerned that the situation was problematic for when taxes were not paid for vehicles destined for the North Slope due to the description of "highways" in statute. She noted that statutes contained three different definitions of highway. Two of the definitions included roads having public access and public maintenance. One other definition contained in AS 19.59.001 described highway as follows: (8) "highway" includes a highway (whether included in primary or secondary systems), road, street, trail, walk, bridge, tunnel, drainage structure and other similar or related structure or facility, and right- of-way thereof, and further includes a ferry system, whether operated solely inside the state or to connect with a Canadian highway, and any such related facility; Ms. Pierson wondered whether the question of how to interpret what a public highway was would be best addressed by the Department of Revenue. She read the passenger vehicle tax statute: The passenger vehicle is a motor vehicle as defined in AS 28.90.990 that is driven or moved on a highway or other public right-of-way of the state. Ms. Pierson concluded that the issue was "hard to define." 8:56:48 AM Representative Gara mentioned the zero fiscal note. Ms. Pierson pointed out that the fiscal note; FN1 (REV) was indeterminate for changes in revenue. She related that the changes reflected in the legislation resulted in a minimal reduction in the vehicle rental tax collected. A costly fiscal note was associated with the previous version of the bill. The weight restriction provision alone lost approximately $750 thousand in revenues for the state. Representative Gara asked whether a business to business rental would pay the rental for the first 28 days. Ms. Pierson replied in the affirmative. She added that a business vehicle rented for less than 28 days on the North Slope would also be taxed according to DOR. Representative Gara referred to page 1, line 12. He deduced that if the rental was longer than twenty-eight days the leasee would qualify for a refund for the initial twenty- eight days. He wondered why the initial 28 days was exempted from the tax. Ms. Pierson disagreed and stated the provisions in the bill specify the conditions of exemption for a lease over twenty-eight days. She read the conditions [page 1, line 12 through page 2, line 5]: (1) the initial lease or rental contract is for a period of 28 days or more; (2) the initial lease or rental contract is in writing; and (3) the lease or rental contract is not terminated before the expiration 1 of 28 days. (c) An extension of a lease or rental that is exempt under (b) of this section is exempt if the extension is agreed upon before the expiration of the initial 28-day lease or rental period and there is no break between the initial period and the period of the extension. Ms. Pierson noted that some vehicles arrive at the North Slope and never leave. Representative Gara requested clarification. He pointed to the conditions on [Section 2] page 1, lines 11 through 14 and page 2, lines 1 through 5 [listed above] and ascertained that the leasee was exempt from the initial 28 day period if the conditions were met. He recommended inserting a provision that the leasee was not exempt from the initial twenty-eight days of tax accrual. Co-Chair Stoltze agreed with the need for clarity. He recollected the floor debate on the original bill and stated that there was not debate about the legislation affecting leased North Slope vehicles. Co-Chair Austerman expressed hesitancy regarding the language. He requested clarity on Section 2. MATT FONDER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE (via teleconference), relayed the departments interpretation that if the vehicle was initially rented for at least 28 days all of the tax, including the initial twenty-eight days was exempted. He understood that the total exemption was the intent of the bill. Co-Chair Austerman asked whether a recreational vehicle (RV) that was rented for thirty days was exempted from the tax. Mr. Fonder replied in the affirmative. Representative Gara stated that many tourists rent vehicles for time periods of thirty days or more. He suggesting adding the following language to the provision on page 1, line 11: "…starting on the 29th rental day." The tax for the initial twenty-eight day period would not be exempted. Representative Thompson stated that the suggested language defeated the purpose of the legislation. He voiced that the bill was modeled after the bed tax collected in the state. The bed tax was waived if the visitor stayed over 30 days and was not collected for the first thirty days. He believed that the provision "would change the whole picture of the bill." Representative Holmes asked why the ninety day period from the initial bill was shorted to twenty-eight days. Co-Chair Stoltze interjected that the twenty-eight day period was chosen due to the fear of unintended consequences. Ms. Pierson clarified that the twenty-eight day period attempted to address the Alaska businesses leasing vehicles to other Alaska businesses rental issue but capture the original intent of the bill aimed at tourism. She indicated that the Alaska business vehicle rentals were mostly long- term contracts and that the shortest business leases were 28 days long based on the shortest month of the year. The language in the bill was taken directly from DOR's regulations. She would welcome committee suggestions to find "a better way" to write the bill. 9:08:11 AM Representative Holmes understood the issue and wasn't suggesting that the initial twenty-eight day period should be taxed, but she expressed concern that the twenty-eight day period was too short. She noted the statutes cited in Section 1: AS 43.52.010 and Section 2: AS 43.52.010 and reported the lack of subsection (a), which did not conform to the original statute. She asked for clarity. Ms. Pierson deduced that the omission was probably a drafting error. Representative Guttenberg relayed personal rental experience regarding taxation. He believed that "there wasn't any way around… the difference between extensions of a few days versus not having to pay any of the tax." He wondered whether the intent of the bill could be met under any situation. Ms. Pierson stated that she was open to suggestions for solutions. Co-Chair Stoltze understood that a considerable amount of vetting occurred between the sponsor and DOR. He suggested that Commissioner Rodell testify on the issue. He wanted to avoid any further "unintended consequences" with any proposed solutions. Representative Munoz asked what the amount of the business to business tax collected annually was. Ms. Pierson replied that the total annual rental car tax collected was $7 million. She remarked that DOR had no way to determine where the vehicles were located in the state, which made it difficult to bracket the tax. She believed that differences in the legislative intent affected implementation of the tax throughout the years. She hoped the original intent regarding passenger vehicle rental car use on Alaska's roads could be accomplished with the legislation. Representative Munoz suggested deleting the word "passenger" and focus on recreational vehicles. Ms. Pierson stated that deletion of "passenger" would exempt every single rental car. She referred to AS 43.52.099 that defined passenger vehicle and read: (2) "passenger vehicle" means a motor vehicle as defined in AS 28.90.990 that is driven or moved on a highway or other public right-of-way in the state, but does not include… Ms. Pierson stated that the sponsor could not find proper language for an additional exclusion. Co-Chair Stoltze wanted the discussion to focus on the equity issue, intended purpose, and whether it was good policy. Co-Chair Austerman expressed similar concern about the legislation opening a loophole in the law allowing a person renting RV's to avoid paying taxes. The leasee would merely have to extend the contract before the twenty-eight day period expired. Ms. Pierson suggested dividing the sections and keeping the recreational vehicles in a separate category. She would confer with DOR on the language. Co-Chair Austerman understood the issue, but felt that the bill did not meet the intention of the legislation. Representative Gara addressed the underlying purpose of the legislation. He commented that most of the real Alaskan businesses bought its own vehicles. If the legislation was focused on the oil industry, he did not believe the industry needed another tax break. The legislature spent a lot of time debating oil tax breaks last year. He voiced that the "state was in the red" and he was not comfortable with that aspect of the bill. HB 314 was HEARD and HELD in committee for further consideration. Co-Chair Stoltze commented that the leasing agencies were the "broader concern" of the legislation. Alaskan businesses were in a "precarious" state with the uncertainty of the law pertaining to lack of enforcement and collection.