HB 298-EXEMPTIONS FROM MINING TAX  1:05:31 PM CO-CHAIR FEIGE announced that the first order of business would be HOUSE BILL NO. 298, "An Act exempting sand and gravel and marketable earth mining operations from the mining license tax; and providing for an effective date." CO-CHAIR SEATON, prime sponsor, explained that HB 298 would exempt sand, gravel, and marketable earth mining operations from the mining license tax. This extremely cumbersome tax is based on the profits of the end product that is made from the sand and gravel. Many operations have numerous end products, such as cinderblock or asphalt, and each one of those products must be tracked to figure out the profit margin on the sand and gravel that went into it. Another way that the tax is cumbersome is that the operators are required to file a consolidated single form for their pits but under the mining license tax they are also required to do the calculation based on the entire mining operation. Therefore, it is a complex set of recording and ways in which the revenues and profits are accounted for. 1:07:37 PM CO-CHAIR SEATON reported that the fiscal impact of the mining license tax is very small. For example, in 2011 the [Department of Revenue (DOR)] received 182 mining license returns from sand and gravel operators, but only 17 of those paid any tax. The reason no tax was paid is because net profits below $40,000 are excluded from the tax. He reminded members about a previously considered re-write of mining tax laws in which the deduction, or the point at which taxes had to be paid, would have been increased two and one-half times to $100,000. He said HB 298 does not go into any other mining operations such as placer or hard rock, it only deals with sand and gravel and marketable earth. By excluding all sand and gravel operations from the mining license tax, HB 298 would provide a much more direct way of getting to the same thing that was trying to be accomplished by raising the exclusion. 1:09:12 PM CO-CHAIR SEATON said the other thing about the fiscal impact is that it has only raised about $206,000 to $320,000 [annually] in the last four or five years, but it costs the Department of Revenue about $150,000 [annually] to administer the program. In one way it could be looked at as a nuisance tax because it raises so little money, but in actuality some of the larger sand and gravel operators sell 80 percent of their product to public works projects, so 80 percent of the tax is being paid for in public works projects. Generally, operators take their costs of doing sand and gravel, including this tax, and put on a 20 percent administrative fee, so the state ends up paying a huge portion of this tax through its public works projects, plus the administrative fee for calculating the tax, and then the audits that are required. He said he thinks that calculations for public works projects would show that the state is losing money by this tax. Additionally, the tax is very burdensome on both small and large businesses. He related that some of the written testimony states that in some cases up to 200 hours of work goes into just maintaining the records and going through audits. 1:11:27 PM CO-CHAIR SEATON further noted that folks from Southeast Alaska have said that all of that region's gravel comes from crushed quarry rock and not sand and gravel mining. Therefore, he has an amendment to extend the definition to quarry rock, sand and gravel. Drawing attention to the Department of Revenue calculations in the committee packets, he pointed out that the quarry rock was included in those calculations. He said that quarry rock gravel also includes the Alaska Peninsula. 1:13:09 PM REPRESENTATIVE KAWASAKI inquired whether HB 298 would affect valuable metals or other minerals outside of sand and gravel or quarry rock. CO-CHAIR SEATON replied no, the bill strictly deals with sand and gravel and marketable earth and, if the amendment is adopted, it will also deal with quarry rock. He said those are exclusive of any metallic minerals or other extractives. REPRESENTATIVE KAWASAKI asked whether marketable earth is defined in the bill or in some other statute. CO-CHAIR SEATON responded that marketable earth is peat and topsoil. He offered to get back to the committee with the definition. 1:14:10 PM REPRESENTATIVE FOSTER said HB 298 sounds like a good proposal, but asked whether any department jobs would be eliminated because of the bill. CO-CHAIR SEATON answered that the Department of Revenue's auditors would be much more profitably used by the state for auditing larger operations that produce more revenue to the state. It is not that those auditors would go to oil and gas, he said, rather their expertise is in auditing the mineral industry and that is where they would be more productively used. 1:15:20 PM REPRESENTATIVE HERRON inquired as to how many tons or yards of sand and gravel are being talked about. CO-CHAIR SEATON responded that back in the 1970s he was amazed to find out that sand and gravel was the state's largest extractive industry. He clarified that HB 298 only deals with the mining license tax and would not affect the royalties that are paid by operators taking sand and gravel off of state land. While he did not have the tonnage, he said the mining license tax is calculated on a profit basis, not a tonnage basis. He offered to provide more information if that was desired. REPRESENTATIVE HERRON said he would just like for it to be on record that it is the largest extracted product in Alaska. CO-CHAIR SEATON added that when he was looking at this for any unintended consequences, he had the [Department of Revenue] look at all municipalities that have a severance or other tax. Of the seven boroughs or municipalities in the state that have a severance tax, none of those taxes are based on the mining license tax. CO-CHAIR FEIGE opened public testimony on HB 298. 1:18:12 PM WES VANDERMARTEN, Vice President, General Manager, Anchorage Sand & Gravel Co., Inc., thanked the sponsor for introducing HB 298. He said Anchorage Sand & Gravel is a vertical integrated company that mines sand and gravel, and gravel-related products, such as concrete, asphalt, aggregates, block, pre-cast concrete, cement, and more. Doing business in Alaska since 1938, Alaska Sand & Gravel's products are used in a wide variety of products in the greater Anchorage area as well as over the state from residential to military and state projects. He outlined the reasons for why Alaska Sand & Gravel is in favor of passing HB 298. The amount of revenue that the state collects on this tax is less than, or at best equal to, what it costs the state to collect it and therefore it is a neutral tax at best. Over the years the state has performed many audits on sand and gravel, with some individual audits lasting over two years. It has been a great strain on the state's auditing department with little results to show for it. The tax is burdensome because it requires a great deal of time to generate the necessary information for filing the tax. The current think of the DOR auditing division is that it is based on a fair market price and should be determined on each product to help calculate revenue. Anchorage Sand & Gravel produces 20-30 different sand and gravel products, so gathering the information is very time consuming and, if audited, the time and expense grow significantly. Anchorage Sand & Gravel's last audit took 18 months to complete and the cost was about $50,000 to compile the information and attend meetings. 1:20:49 PM MR. VANDERMARTEN maintained that the mining tax as it relates to sand and gravel is very ambiguous and inconsistent. Other mining operations, such as gold, silver, zinc, and coal, are indexed and the values are very easily defined and very traceable, but that is not the case for sand and gravel. The various gravel producers in the state have very different processes and markets that they deal in, thus it is difficult to determine a fair market price. For example, Anchorage Sand & Gravel is strictly a supply company, so all it does is sell to other contractors, while other producers tend to lean toward construction and their products are used on their own projects. So, coming up with a fair market value that is fair and easy to determine is the root of the problem and the auditors and producers struggle with making it a consistent tax across the board. The amount of tax paid by one producer may vary greatly on the same product that another producer might pay. MR. VANDERMARTEN pointed out that governments are the customers for the majority of Anchorage Sand & Gravel's products; so much of the cost of the tax is just passed back to the state. Summarizing, he said the mining license tax is a non-productive tax, it is burdensome and time consuming for both the producer and the state auditing department, and it is inconsistent because there is no market index. For these reasons, Anchorage Sand & Gravel feels that sand and gravel should be exempted from the mining license tax statute. 1:22:43 PM CO-CHAIR SEATON asked whether Mr. Vandermarten has any feelings about amending the bill to include quarried rock. MR. VANDERMARTEN replied that he does not think it will have any effect. In further response, he said Anchorage Sand & Gravel does not do quarry rock. He understood that the production of quarry rock is very limited in the state. 1:23:40 PM JULIE OLSON, CPA, Controller, Secon, noted that Secon is a subsidiary of Colaska. She said she was an auditor in public accounting for 11 years and has now worked for SECON for a year and a half. The volume and amount of effort going into preparing for the audit that Secon has been undergoing has been overwhelming, she continued. Secon has spent about 200 hours preparing for the audit. While the auditors have been great and are trying to do their job to make sure that Secon is complying with the tax return requirements, it has been really difficult to provide the auditors with what they need and in the right format. She stressed the difficulty of complying with the audit requirements and how burdensome that has been. She said she fully supports HB 298 and thanked the sponsor. 1:25:02 PM MS. OLSON, in response to Co-Chair Feige, said she is the controller for [Secon] in Juneau and that there are four other accountants who do various levels of activities, but the majority of the information flows through her. In further response to Co-Chair Feige and Representative Gardner, she confirmed that she would have no difficulty in re-utilizing those other people in other areas and that HB 298 would not put anyone out of work. 1:26:19 PM CHERYL SHAFER, Owner, Dibble Creek Rock, Ltd., stated that hers is a small, family run sand and gravel and ready mix business on the lower Kenai Peninsula. She said her company also finds it burdensome to apply the mining license tax to its sand and gravel operations, which is a basic industry with a low value product. Her company has experienced the same difficulties as stated in written and oral testimony by the big companies. Dibble Creek Rock owns and leases multiple gravel sites and it is an accounting nightmare to try to separate the company's products from the several different sources and that are used for different products. She explained that she has to file double mining tax returns on all of her company's pits simply because the title of the property is held in a different name, which is her husband and herself, than their company name which is Dibble Creek Rock, Ltd., the operator of the pits. 1:27:32 PM MS. SHAFER said her company is also currently being audited by the Department of Revenue for three years of mining tax returns and this audit has been going on since 2009. It is just a two- person office and she is the one who has been spending time trying to accommodate all of the information that the Department of Revenue has been asking for. Both she and the department find it difficult to separate out the company's mining activities from its integrated activities. More time is actually spent by trying to comply and file a correct mining tax report than it does for her to figure out her company's federal corporate tax. Dibble Creek Rock feels that taxing such a basic industry in such a complex way hurts the economic outlook of the state because it drives up the price on fundamental products that everyone needs. She said her company strongly supports passing HB 298 to exempt sand and gravel and marketable earth mining operations from the mining tax law. She thanked the sponsor for bringing this issue to the committee's attention. 1:29:28 PM MARC COTTINI, Owner, Quest Engineering Inc., testified that his company got involved in the gravel business and representing clients about six years ago when the Matanuska-Susitna Borough started regulating extraction sites in the borough. Through that process, his firm learned of the requirement of the mining license tax. The company went through a long process with its clients and with two CPAs and during that process the company even had to go through back audits. Quest Engineering found the auditors in Anchorage very helpful and kind, but they were doing their job thoroughly. His company's clients are small gravel pit operators and because of the $40,000 exemption none of them owed any taxes, but they had to fill out the forms. He said the audits were a heavy and expensive burden of time and money. Over the last six years, none of his clients in approximately seven different locations have had to pay any tax. He urged the committee to pass HB 298 because the tax is an undue burden and a hardship. If nothing else, the main thing is exempting small firms from the paperwork. Since they are already exempt from paying any tax it would be nice to be exempt from the paperwork. 1:31:50 PM MR. COTTINI, regarding how much burden is involved, said he spends about eight hours once a year for every site his company is at; currently, Quest Engineering is actively processing at three sites. Additionally, he spends another day answering questions from the individuals, trusts, landowners, and businesses that receive royalties from Quest to make sure that they get the information correct because the auditors compare the forms submitted by Flintstone Inc. - Quest's gravel screening business - to the forms sent in by the folks receiving the royalties. If there is a mismatch there is an audit. Therefore, he sets aside one full week every winter to process this paperwork. If he does not process this paperwork he will not get a mining license to operate the following summer, nor will the sites where his company works at. MR. COTTINI closed his testimony by noting that after he spends his time putting together the paperwork he gives it to his CPA. He related that his bookkeeper said Quest Engineering paid the CPA about $400 per mining license tax return, but paid the CPA less than $300 to do the company's federal business tax returns. 1:34:13 PM TOM HEALY, Executive Director, Alaska Rock Products Association, stated that his business association of sand and gravel producers supports HB 298. He related that the applicability of the mining license tax program to sand and gravel producers has been a concern amongst these producers for several years. One principle that supports exemption from a tax is whether the effort to collect an audit tax from a certain business is out of proportion to the tax benefit received, and this is exactly the situation that HB 298 addresses. The mining license tax as it applies to sand and gravel operations results in tax reporting and tax audit procedures that are overly complex and time consuming for both operators and Department of Revenue staff. There is no listed market value for sand and gravel products like there is for gold, silver, and other valuable minerals. Sand and gravel pricing is determined by individual contracts and bids and the same product can be priced differently by different producers on the same day. Combined with the variety of sand and gravel products, this results in a reporting and audit process that is far more complex than that for a gold mine producing one product with a known market value. 1:36:12 PM MR. HEALY said that sand and gravel tax revenue to the state is a relatively small portion of the total mining license revenue. The result is an inefficient upside down situation for sand and gravel producers - the lowest value mineral products are being subject to the most complex reporting and audit requirements. MR. HEALY point out that another important distinction involving the sand and gravel industry is that its products literally form the foundation of local, state, and federal capital projects. Exempting sand and gravel operators from the mining license tax would reduce the cost to government agencies for capital projects. Finally, operators that are presently exempt from the mining license tax must still spend time and expense to submit to the state. This is not a cost effective use of limited company or state resources. He reiterated his association's support for passage of HB 298. 1:37:33 PM JOHN MACKINNON, Executive Director, Associated General Contractors of Alaska, explained that his construction trade association is composed of over 650 business members. Since the technical problems with the mining license tax have already been discussed, he said he will instead provide a history of where the state is today. He related that last spring some of his member companies received audit letters that they immediately sent to him with comments that he cannot repeat in testimony. Looking into it, his organization realized that the present license tax structure was poorly applied to aggregate production in the construction industry. While it works well with minerals and other items from the earth, the tax does not make sense for aggregate production because of the complexity of processing. His organization approached the Department of Revenue last summer about the problems with the present tax as it applied to quarry rock and sand and gravel operations and how the present requirements could be improved. Associated General Contractors came looking for a simpler way of calculating the tax and a simpler audit process that would be revenue neutral; it was not asking for an exemption. 1:39:20 PM MR. MACKINNON explained that the Department of Revenue came back to his organization after researching the issue and said the simplest solution would be to exempt quarry rock and sand and gravel operations from the requirements, rather than replacing a tax with a tax. Both the industry and the Department of Revenue have concluded that it is a true nuisance tax because it produces very little revenue for the state and for the construction industry it is expensive and very complicated to calculate and to prove up on an audit. The majority of the material mined and used goes into public works projects, so government is really paying the tax bill a couple of times over. So, what appears on the surface to be a self-serving piece of legislation for the benefit of the construction industry is really the result of a cooperative effort of industry, the Department of Revenue, the administration, and now the legislature to get rid of a nuisance tax and provide a long-term public benefit. 1:40:43 PM MR. MACKINNON, in response to Representative Gardner, confirmed that it is he who can be blamed for coordinating the deluge of letters received by committee members about this tax. CO-CHAIR SEATON commented that this shows the usefulness of associations of people acting together to bring an issue forward in a coordinated manner. He said that when this problem was presented to him he called sand and gravel operators across his district and received the same response from every person he contacted, yet most legislators had not heard from those individual operators. REPRESENTATIVE P. WILSON added that this makes her wonder how many other laws on the books are not worth having. She said it is joy to take something away that will make life better for others and the state at the same time. CO-CHAIR FEIGE closed public testimony on HB 298. 1:43:42 PM CO-CHAIR SEATON moved that the committee adopt Amendment 1, labeled 27-LS1263\A.1, Bullock, 1/31/12, written as follows [original punctuation provided]: Page 1, line 1: Delete "sand and gravel" Insert "quarry rock, sand and gravel," Page 2, line 3, following "earth,": Insert "quarry rock," There being no objection to adopting Amendment 1, it was so ordered. 1:44:43 PM CO-CHAIR FEIGE opened committee discussion on the bill. REPRESENTATIVE KAWASAKI observed that the fiscal note is $0 for the Division of Mining, Land and Water, but for the Department of Revenue in Fiscal Year 2013 and five years out it is a $300,000 decrement while operating expenditures and fund source are $0. He asked whether the department will be working on other things if the mining license tax is no longer itemized. JOHANNA BALES, Deputy Director, Anchorage Office, Tax Division, Department of Revenue, provided a history of how the department got to that. When sand and gravel operators in the Matanuska- Susitna Borough were told that they needed permits the department was contacted by the borough and the department realized that it had several non-compliant sand and gravel operators in the state. The department then pulled resources from other excise tax types to do a compliance activity, which spanned about three years. The compliance activity brought approximately 150 new taxpayers into the fold with absolutely no increase in revenue. Once the department realized this it began putting those resources back on the other tax types from which they came. The department is currently closing out the sand and gravel audits that were mentioned during the testimony and is putting resources into other areas. 1:46:49 PM REPRESENTATIVE KAWASAKI inquired whether there are other taxes that cost the state an exorbitant amount without being useful. MS. BALES responded that the division does look at all of its tax programs and determinations to conduct audits based on looking at revenue. However, some taxes, such as alcohol and cigarette taxes, are levied not just for revenue purposes. So, the division does compliance audits in those areas hoping that everyone is paying the tax and the intended purpose of those taxes will be reached. She said the division is open to having dialog to look at all of the taxes. 1:48:26 PM REPRESENTATIVE P. WILSON said it is good to know that some taxes are not for the purpose of actually collecting the tax. She requested that when the department comes across something that is a waste of time that it let legislators know so it can be taken off the books. There is no sense in having things on the books that are redundant or not worth the effort, she concluded. MS. BALES replied that the aforementioned request is duly noted and she looks forward to working with the legislature on things like this. REPRESENTATIVE MUNOZ agreed that onerous taxes like the mining license tax should be brought to the legislature's attention by the department. She said the bill and its title is very narrow and prevents the bill from becoming a vehicle in other committees for that possibility. She wants to be clear to people in the mining community that the intention here is focused on sand and gravel operations. 1:50:46 PM CO-CHAIR SEATON pointed out that his office investigated whether there was any large taxpayer that this would exclude, such as building a gravel island. It turns out that building a gravel island is using resources from a company's lease so that is not included in the bill's provisions. CO-CHAIR FEIGE closed discussion on HB 298. 1:51:39 PM REPRESENTATIVE MUNOZ moved to report HB 298, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 298(RES) was reported from the House Resources Standing Committee.