HB 217-TAX ON GAS FOR IN STATE MANUFACTURING   1:38:19 PM CO-CHAIR NEUMAN announced that the next order of business is HOUSE BILL NO. 217, "An Act relating to the tax applicable to the production of natural gas used in the state as fuel or feedstock in producing a manufactured end product." The committee took an at-ease from 1:38 p.m. to 1:39 p.m. [Due to technical difficulties the audio for the time period from 1:39 p.m. to 1:41 p.m. is unavailable.] 1:40:20 PM REPRESENTATIVE OLSON moved Amendment 1, labeled 26-LS0816\A.1, Bullock, 4/13/09, as follows: Page 1, following line 8: Insert a new bill section to read: "* Sec. 2. AS 43.55.900 is amended by adding a new paragraph to read: (25) "manufacturing process" means a process that involves a chemical transformation of feedstock gas or combination of feedstock gas with other components." CO-CHAIR NEUMAN objected for purpose of discussion. 1:41:04 PM REPRESENTATIVE GUTTENBERG asked what AS 43.55.900 is related to. CO-CHAIR NEUMAN said he believes it has to do with the in-state five percent production tax on oil and gas. DONALD BULLOCK JR., Legislative Counsel, Legislative Legal and Research Services, Legislative Affairs Agency, Alaska State Legislature, first pointed out that the phrase "used in the state" in HB 217 is important because there is a tax cap under the production tax in AS 43.55.0110, subsection (o), that caps gas that is produced outside of Cook Inlet and used in the state and the cap is equal to the tax cap that is on Cook Inlet gas. He said 43.55.900 is the section of the production tax that includes all the definitions for that chapter. He explained that HB 217 and Amendment 1 amend the definition in paragraph (24) and add the definition for manufacturing process in paragraph (25). 1:42:58 PM REPRESENTATIVE SEATON understood that under Amendment 1 the conversion of gas to fertilizer or the petrochemical industry producing a different product would be considered a manufacturing process, whereas simply chilling and liquefying the gas or simply stripping out the propane without changing it would not be considered a manufacturing process. CO-CHAIR NEUMAN responded that his intent with HB 217 is to ensure there is added value. Pulling out propanes, butanes, and ethanes from natural gas would be an added value because it would be creating jobs and industry within the state and therefore it would be considered manufacturing. Simply liquefying natural gas would not be included. 1:44:19 PM REPRESENTATIVE SEATON said he is unsure that this definition qualifies for Representative Neuman's intent. CO-CHAIR NEUMAN replied that HB 217 will be held so that work in this regard can continue. MR. BULLOCK said he reads the description of the manufacturing process in Amendment 1 as meaning that something is coming out that is different than what went in. If the gas is just liquefied, it is the same thing that went in that is coming out. If it is combined with other chemicals to produce a product, or if is used as the substance for something like fertilizer, then that is the manufacturing process that has changed the gas. CO-CHAIR NEUMAN removed his objection to Amendment 1. There being no further objection, Amendment 1 was passed. 1:45:31 PM CO-CHAIR NEUMAN said his intent in HB 217 is to ensure more added value processing of Alaska's natural gas. The processing of gas to liquids in Alaska by the military would fall under the definition of used in state and would fall under a 5 percent production tax. This was expanded to encompass all of the state when Alaska's Clear and Equitable Share (ACES) became law, he continued. Under current law, in-state use only applies to the generation of electricity or home heating, and HB 217 would expand this to include the use of gas as fuel or feedstock in manufacturing. Creating more added value through manufacturing would expand the economic opportunities to the state for its natural gas, as opposed to just exporting it. He noted that he will hold the bill because he is unsure whether the 5 percent is enough incentive and there may be something else that can be added. REPRESENTATIVE GUTTENBERG cautioned that there might be processes of using the gas that people in Alaska are currently unaware of because there is presently so little of this industry in the state, and this limited knowledge could result in leaving the state on the short end. 1:48:52 PM REPRESENTATIVE SEATON inquired whether taxes on natural gas liquids (NGLs) are oil taxes or gas taxes. MR. BULLOCK said he is unsure. KEVIN BANKS, Director, Division of Oil & Gas, Department of Natural Resources, deferred to the Department of Revenue. LENNIE DEES, Audit Master, Tax-Production Audit Group, Department of Revenue, stated that, under statute, natural gas liquids are taxed as oil. CO-CHAIR NEUMAN held over HB 217.   1:51:13 PM