HB 334-OIL & GAS TRANSFERABLE TAX CREDIT CERT.  CO-CHAIR SADDLER announced that the first order of business would be HOUSE BILL NO. 334, "An Act relating to the qualified oil and gas service industry expenditure credit; and relating to a credit against oil and gas exploration, production, and pipeline transportation property taxes." 1:08:39 PM REPRESENTATIVE LANCE PRUITT, Alaska State Legislature, stated that he will speak to the work draft for HB 334, Version U [labeled 28-LS1407\U, Nauman, 3/4/14 and not yet before the committee]. Relating the reason for his introducing HB 334, he said he visited the [Alaska Ship and Dry Dock, Inc. shipyard] in Ketchikan this past summer. During this visit he discovered the shipyard facility could not use a tax credit the legislature passed last year [to AS 43.20.049]. He explained that the tax credit requires the party must be a taxpayer to qualify, but a government entity, the Alaska Industrial Development and Export Authority (AIDEA) owns the actual yard. He discussed this with Mike Pawlowski, Department of Revenue (DOR), who suggested a possible remedy for an entity that is not a state taxpayer without providing a blanket exemption. After some discussion, he developed the work draft [Version U]. It would apply a credit to the state property tax on the asset by the owner. The owner could take a credit over five years, although the credit cannot reduce the tax to less than zero. It would also include an option for a municipality to use the credit. He described a scenario that illustrated how Seward's Ship Dry Dock [and Ship's Chandlery] might also be interested in the tax credit. He stated the goal of HB 334 is to ensure that as many Alaskans as possible have an opportunity to participate in what he viewed as the "renaissance" from SB 21 and bring manufacturing back home to Alaska. 1:13:09 PM REPRESENTATIVE SEATON moved to adopt the proposed committee substitute (CS) for HB 334, Version U, labeled 28-LS1407\U, Nauman, 3/4/14, as the working document. There being no objection, Version U was before the committee. REPRESENTATIVE P. WILSON remarked that [SB 21] acknowledges that North Slope companies often order equipment to be built in the Lower 48 or another country. The goal of [SB 21] was to provide an incentive that would provide jobs for Alaskans and that if the product was produced in Alaska, the company could obtain a tax credit. 1:15:02 PM REPRESENTATIVE HAWKER related his understanding that HB 334 would allow a transferable tax credit for improvements to the tangible personal property under AS 43.20.049 to be applied against taxes under AS 43.56. He asked the reason to allow the tax credit to property tax since the broader interpretation would allow the tax credit against corporate income tax, production tax, or property tax liabilities. REPRESENTATIVE PRUITT deferred to the bill drafter. EMILY NAUMAN, Attorney, Legislative Legal Counsel, Legislative Legal and Research Services, Legislative Affairs Agency, replied the question raised by Representative Hawker is completely a policy call. 1:16:36 PM REPRESENTATIVE HAWKER, referring to the difference between the original version of the bill and Version U, said that the original version of HB 334 limited the tax credit to the initial purchaser of the tangible personal property. He offered his belief that Version U broadens this substantially by allowing the tax credit to be traded freely on the open market DIRK CRAFT, Staff, Representative Lance Pruitt, Alaska State Legislature, stated that the initial language was more limiting. He explained that Version U was broadened to make it applicable to anyone associated with the property. He related his understanding that the tax credit is still limited to anyone associated with the property. 1:17:49 PM REPRESENTATIVE HAWKER questioned whether that allowance is in the [bill]. He read from AS 43.20.052 (a), as follows: A person that is entitled to take a credit under AS 43.20.049 that wishes to transfer the unused credit to another person may apply to the department for a transferable tax credit certificate. REPRESENTATIVE HAWKER said that any restriction to "another person" would not exist. MR. CRAFT replied correct. 1:18:37 PM REPRESENTATIVE SEATON asked for further clarification on the reason to allow the credit to be applied to property tax liability instead of limiting the tax credit to corporate income tax liability. He didn't think the language in the bill would limit the tax credit to the construction. REPRESENTATIVE PRUITT answered that the genesis for allowing tax credits against the property tax liability was to avoid creating a tax credit similar to the film tax credit that could be applied by someone without an existing tax liability. He related a scenario to illustrate how a company might build something yet not have a tax liability. This would allow not only the major investors but also the service industry to benefit. These parties may own the asset but not have a tax yet Version U would allow them to apply tax credits to their personal property tax liability. 1:21:05 PM REPRESENTATIVE SEATON said it seems like the tax credit is so broadly applied that it doesn't limit the tax credit to the party who owns the asset. The tax credits could apply to someone who builds something but if the company doesn't have any corporate tax liability, the tax credit could be transferred to anyone who has a property tax liability. Further, it doesn't seem to be limited just to oil and gas properties. He asked if the tax credit will be limited to oil and gas properties or if it will include other properties as well. REPRESENTATIVE PRUITT answered that the intent was to apply the tax credit to the oil and gas industry, although it is a policy call if the committee wants to go beyond the industry. The bill evolved due to recognition of some limitations to the tax credit. He hoped that companies in places like Southeast Alaska and Seward could participate in the oil development that occurs in other parts of the state. 1:22:50 PM REPRESENTATIVE HAWKER understood that, as written, Version U would allow the tax credit to be applied against taxes levied under AS 43.56. He said the title of the chapter is oil and gas exploration, production, and pipeline transportation property taxes, which provides a broad scope for the industry since it includes pipeline transportation. REPRESENTATIVE PRUITT agreed. 1:23:33 PM REPRESENTATIVE SEATON understood the tax credit could be used by someone building modules, but it will have to be transferred to the oil companies or to someone with pipeline taxes. REPRESENTATIVE PRUITT replied yes. He explained that Vigor Industrial and Alaska Ship and Dry Dock, Inc. do not have any tax liability to the state. Thus, the bill would make the tax credits transferable to any company producing their products. 1:25:00 PM REPRESENTATIVE KAWASAKI understood that an oil and gas corporation that is making money under AS 43.20 would have a transferable tax credit that could be purchased by a company in the same field to apply towards the company's property tax liability. REPRESENTATIVE PRUITT believed it would be applicable. REPRESENTATIVE KAWASAKI surmised that a North Slope oil and gas company could go to a Fairbanks or Anchorage company and use the tax credit to reduce property taxes for their related facilities. REPRESENTATIVE PRUITT acknowledged that he raises a good point that a company in Fairbanks might be able to reduce its property tax liability. 1:26:41 PM REPRESENTATIVE SEATON recalled that often small companies cannot use the tax credit, unless they are oil and gas companies, so the parties must transfer these credits. He wondered how this would stimulate in-state manufacturing if the parties must transfer their tax credits - probably at a discount - to gain any benefit. REPRESENTATIVE PRUITT suggested Vigor Industrial, Inc. may be able to address the question. 1:29:02 PM REPRESENTATIVE P. WILSON related her understanding that the company will obtain a discount by having the product made in Alaska, which could encourage manufacturing in Alaska. It will provide the indirect benefit by creating manufacturing jobs in Alaska even though it might not directly benefit the manufacturer. REPRESENTATIVE TARR offered her understanding that the tax credit would only apply to oil and gas property taxes due to the state and not to municipal tax liabilities. REPRESENTATIVE PRUITT said yes, but said the goal is to allow an option to use the tax credits for municipal property taxes. 1:31:02 PM CO-CHAIR FEIGE related a scenario to illustrate the tax credit limitations for an oil and gas company when contracting with a manufacturer to produce something for a North Slope project. The oil and gas company would be limited to no more than $10 million in tax credits in any year, although the company can hold the tax credits in up to five successive tax years. However, under Version U, the question is whether the tax credit is transferrable and if an oil and gas company can transfer tax credits in excess of $10 million to another company to use. 1:33:12 PM REPRESENTATIVE SEATON asked for clarification on the language in Version U that allows an option for taxpayers in other communities to use the tax credit. MR. CRAFT replied that the option is under discussion but is not yet in the bill. REPRESENTATIVE PRUITT agreed. He acknowledged that is the intent, but the bill is a work in progress. 1:34:12 PM REPRESENTATIVE TARR referred to page 2 of the fiscal note that states the department cannot determine the amount of tax credits that may be claimed by taxpayers as the department currently has no information about the amount of this type of activity in the state. She wondered whether the department could provide a general idea of the impact since this could amount to millions of dollars in tax credits. MATT FONDER, Director, Tax Division, Department of Revenue (DOR), responded that Representative Tarr's question is difficult to answer. He explained that the manufacturing credit under discussion was adopted under SB 21, which has not yet been in effect for a full year so the department doesn't have any solid information on the proposed tax credit. REPRESENTATIVE PRUITT remarked that currently the state hasn't been looking in-state for manufacturing, especially in terms of maritime oil and gas development. He said if the state allows someone to manufacture offshore platforms or other equipment in the state, it could then potentially impact the state's revenues. 1:37:03 PM REPRESENTATIVE HAWKER recalled prior discussions during the legislative process on SB 21, about who would be qualified to take the corporate income tax credit. It was envisioned the credit would seldom be used. He further recalled conversations about limiting the applicability of the front-loaded tax credits that had unbalanced the tax system. He wondered if this bill would change the intent of SB 21. He proffered that HB 334 would substantially increase applicability of this tax credit, but seems to go against the philosophy for development of SB 21. REPRESENTATIVE PRUITT remarked that he didn't necessarily disagree. He introduced HB 334 since some areas of the state currently cannot participate in the development of the state's oil and gas resources. Certainly, it's important not to burden the state in the capacity the state had under Alaska's Clear and Equitable Share (ACES), but this seemed to create a way for people to potentially use this tax credit, even if it only allows a few people in Southeast Alaska to participate in oil and gas development in Alaska. Additionally, it would allow the state to use the shipyard, one of its assets, on a larger scale. REPRESENTATIVE HAWKER absolutely agreed. One reason he liked the original version of HB 334 is that he envisioned a participant in the North Slope might have a corporate income tax liability. However, taking the corporate income tax and making it transferable to property taxes also creates some complexities due to the interplay between state and local property taxes. He suggested that the sponsor may wish to ensure the bill targets the parties it intends to benefit in the most efficient way. REPRESENTATIVE PRUITT answered "duly noted." 1:43:18 PM REPRESENTATIVE KAWASAKI shared some of the concerns mentioned in terms of local taxation issues. He asked for further clarification on what constitutes a modification. REPRESENTATIVE PRUITT deferred to the DOR. 1:44:19 PM REPRESENTATIVE SEATON said his reading of this is that the oil service industry could build a pipeline from the west side of Cook Inlet to the Tesoro Refinery to use the tax credit. He asked for further clarification on whether this bill would mean 10 percent of the pipeline would be eligible. REPRESENTATIVE PRUITT answered no; the intent is not any work that is done, but whether the asset is manufactured or modified at the facility in-state, pointing out a pipeline wouldn't be manufactured in-state. REPRESENTATIVE SEATON said he will go back and review the constraints on SB 21 expenditure credits. He was unsure whether a service industry would qualify for tax credits if a gas treatment plant was built on the North Slope. REPRESENTATIVE HAWKER clarified the credits relate only to tangible personal property. 1:46:28 PM REPRESENTATIVE JOHNSON recalled the purpose of SB 21 was to apply against corporate income tax. He recalled the goal was to encourage companies to become corporations, which could increase the tax rolls. However, he wondered if this would run afoul of the interstate commerce if the state offers a discount beyond a normal discount for in-state purchase. REPRESENTATIVE P. WILSON suggested there could be optional language inserted to avoid problems with interstate commerce since she didn't currently see that language in the bill. 1:48:27 PM REPRESENTATIVE JOHNSON, recalling the state couldn't go above a certain number for local hire, wondered whether the threshold was at 10 or 15 percent or 50 percent before the state would have issues with federal interstate commerce. He said he would be curious how that relates to projects. REPRESENTATIVE PRUITT deferred to the legislative attorney. In terms of encouraging companies to become corporations and pay corporate income tax, he suggested the bill was another way to allow LLCs to benefit. He did not see a way for companies like Vigor Alaska to qualify for tax credits which is the reason he was looking towards using tax credits to offset personal property taxes. 1:50:25 PM CO-CHAIR SADDLER opened public testimony on HB 334. 1:50:51 PM FRED KIGA, Senior Vice President, Vigor Alaska, Vigor Industrial, Inc., testified in support of HB 334 and thanked members for considering the concept embodied in HB 334. He said that Vigor reviewed SB 21 last year in terms of ways to enhance tangible personal property for oil and gas development and production. Over a six-month period, Vigor held discussions with Mike Pawlowski of DOR to consider a variety of ways to frame tax credits designed to enhance employment for Alaskans and economic development in Alaska. Ultimately, using a property tax credit under AS 43.56 seemed to be the way to develop that concept. He acknowledged that "it's somewhat squishy" when considering the production income tax credit and whether companies have tax nexus for purposes of using it. MR. KIGA said parties with tangible property are generally subject to the state property taxes. In terms of out-of-state oil and gas companies, the provisions of AS 43.56 provide a credit against expenses going forward. From the 10,000 foot level, this concept could help oil and gas companies evaluate the economic cost of whether to invest or use an in-state manufacturer to create an asset. He stated this as the goal of HB 334 and the direction he hoped the legislature would take. 1:53:55 PM DOUG WARD, Director, Shipyard Development, Vigor Alaska, Vigor Industrial, Inc. (Vigor), stated he has been associated with the Ketchikan Shipyard for over twenty years. He lauded the pride and joy that young workers have in building ships in Alaska. He highlighted some challenges his company faces as a shipbuilder in Alaska. He offered his belief that Alaska has one of the most modern shipbuilding factories in North America due to the partnership that exists between AIDEA, the community of Ketchikan, and industry. Certainly, that's true in Ketchikan, given the size of the Ketchikan shipyard. This facility not only focuses on the best practice for facility design and infrastructure, but also on the human workforce development plan. As of 2013, the company employs 161 productive workers, of which 13 percent are women. The shipyard project began as an economic development project through AIDEA. It initially was a DOT&PF maintenance facility, but ship building and repairs began once AIDEA took it over. 1:55:42 PM MR. WARD advised that the shipbuilding component provides year- round stability for the workforce and a stable economic base for seasonal boat repairs. He detailed shipbuilding at the facilities, such that the shipyard built two airport ferries for the Ketchikan airport, a marine fueling station for the Olympics in Vancouver, the Susitna ferry, and an ice-strength twin-hull vessel destined for service in Cook Inlet, which may ultimately operate on the North Slope serving the oil and gas industry due to the ice-breaking capabilities. Additionally, the shipyard has completed building a longliner destined for the Bering Sea. MR. WARD said as Vigor looks forward, HB 334 could accelerate the state's return on its investment in the shipyard. He stated that an influx of businesses are moving to Ketchikan, noting that two naval architecture firms recently opened offices in Ketchikan. Additionally, two international marine electronics firms are looking to open shops in Ketchikan. However, the vendor base is lacking in Alaska as compared to the Gulf of Mexico or Puget Sound. He emphasized that Vigor believes HB 334 will help to move the company to participate in the oil and gas industry sooner and it will encourage additional customers to do business in Alaska, such as marine operators who buy ships and operate vessels. Further, HB 334 could be valuable to those types of customers, he said. Vigor has also been looking at the Seward shipyard since Cook Inlet has begun taking off. 1:58:18 PM MR. WARD anticipated that HB 334 could help small liquefied natural gas (LNG) projects in the future. He clarified that it could potentially reduce costs by 20-30 percent in the distribution of the small LNG projects by using marine transport to move products throughout the state, which in turn could stimulate more manufacturing in Southeast Alaska. Since these assets are expensive and time-consuming to build, HB 334 could be a useful financing tool for shipbuilding in Alaska. 1:59:31 PM REPRESENTATIVE TARR recapped that current projects wouldn't qualify but this bill might encourage more activity to occur. MR. WARD answered absolutely. Currently the oil and gas industry defaults to the Gulf of Mexico, with nearly 60 years of oil and gas experience. He characterized the Gulf of Mexico area as a very mature industry with competitive shipyards. As the state works towards building industrial activity, it faces obstacles in Alaska, such as great distances between population bases, the lack of a vendor base, more onerous environmental regulations than in the Gulf of Mexico, and higher labor rates. He surmised that the workers are paid 40 percent more in Southeast Alaska than in the Gulf of Mexico region. Thus, these types of tax credits could help encourage people to use Alaska manufacturers in the future, noting, of course, that the activity would need to meet the definition of modification or manufacturing as defined by the DOR. 2:01:23 PM REPRESENTATIVE TARR understood some physical limitations could exclude Alaska from being involved in some of the projects. She asked for further clarification on Alaska's shipyard size limitations. MR. WARD responded that those with manufacturing capacity in the state need to be selective on projects as the industry moves into the oil and gas arena. For example, the Ketchikan shipyard is limited to building an optimal 250-foot vessel, although the shipyard could accommodate a 500-foot vessel. Considerations companies will make will be to assess services available in any community and what the facility is designed to build. He anticipated significant opportunities in shipbuilding in the next 10-20 years. Once Alaska reaches the vendor base and scale, the state could be looking at larger projects, he said. 2:03:22 PM REPRESENTATIVE FEIGE inquired what types of projects does the shipyard envision manufacturing and how would these projects fit under the definition of qualified oil and gas service industry expenditures [under HB 334]. MR. WARD said representatives of ExxonMobil Corporation, Inc. will visit the shipyard in the near future to discuss projects for Point Thomson. One opportunity could be to manufacture 1,000 gallon double-walled storage tanks. Additionally, on the main transportation side, small LNG carriers - cryogenic ships - are being developed in Norway to distribute gas to small communities. He suggested a series of barges with cryogenic containers could be dropped off in coastal communities on a monthly basis. He anticipated that Vigor will also consider articulated tug and barge setups, potentially performing some work at liquefaction plants or re-liquefaction plants, as well as providing the marine transportation component of distributing gas in the state. MR. KIGA added that as oil and gas exploration develops on the Chukchi and Beaufort Seas, the likelihood exists that some of the supply vessels that accompany the drill rigs could stop for service at Ketchikan or Seward shipyards. He acknowledged this assumes the activity will meet the definition of modifications or manufacturing under the existing statutes. If so, these activities could also qualify for the tax credits. 2:05:51 PM CO-CHAIR SADDLER asked for the size of the small LNG carriers. MR. WARD anticipated that the ship sizes range from 250 to 650 foot LNG carriers, although he was unsure of the exact capacity. He characterized them as being relatively small LNG carriers and within his company's range to build in Ketchikan. 2:07:04 PM REPRESENTATIVE HAWKER thanked the committee for furnishing a copy of AS 43.20.049. He said that this statute allows a taxpayer to apply a credit against the tax due under this chapter, which relates to corporation income tax, against a qualified oil and gas service industry expenditure incurred in the state. He said the definition of "qualified oil and gas service industry expenditure" means an expenditure directly attributable to an in-state manufacture or in-state modification of tangible personal property used in the exploration for, development of, or production of oil or gas deposits, but does not include components or equipment used for or in the process of that manufacturing or modification. REPRESENTATIVE HAWKER questioned layering this tax credit. He related a scenario to illustrate the point that not only does an oil and gas operator incur expenditures with vendors, but those vendors are doing business with other vendors, who in turn are conducting business with yet other vendors. He wondered whether the language in SB 21 or HB 334 clearly states that the intent is to offer one tax credit against tangible personal property. Although this question might be considered rhetorical, he would like the record to be clear that HB 334 intends to offer one tax credit to a single tangible personal property. He suggested that the language in HB 334 might need to be clarified. MIKE PAWLOWSKI, Deputy Commissioner, Office of the Commissioner, Department of Revenue (DOR), offered to discuss the underlying statute. First, the nexus to the definition of tangible personal property used in the exploration for, development of, or production of oil or gas was written specifically because it's a nexus to the property tax statute. He said that AS 43.56 levies oil and gas property taxes at a statewide level on tangible personal property used so it was the manufacture of something that was going to create a tax base in the state to begin with. Secondly, he referred to the language in AS 43.20.049(c), which prevents the expenditure from being used for a deduction against the tax levied under this chapter or a credit or deduction under another provision of this title. In Representative Hawker's example of an exploration company, with the "loss carry forward" which he reminded the committee retained in SB 21 for the benefit of new entrants, along with the exploration credits "on the books, at least in middle earth for a little while," the use of that expenditure for a producer or explorer is more valuable as a deduction or qualifying expenditure for one of the other credits in this chapter. He summarized that this was the limiting utility in the way the underlying statute was drafted. This narrowly would apply to a group that really is a corporate income taxpayer who might be the service company working with the producer or explorer. He offered a willingness to continue to work with the committee to develop "sideboards" on the language. However, the limiting factor in the development of the credit was to recognize that the expenditures are more valuable in other places in statute, he said. 2:12:47 PM REPRESENTATIVE HAWKER appreciated the relative value of an individual expenditure. He said that someone claiming the tax credit will be limited to a one-time credit; however, a person contracting with the company couldn't also claim the credit. He suggested that at some point it will be necessary to fine tune who actually is eligible for tax credit. MR. PAWLOWSKI answered correct. 2:13:18 PM REPRESENTATIVE HAWKER returned to [AS 43.20.049] (c), which read: An expenditure that is the basis of the credit under this section may not be the basis for (1) a deduction against the tax levied under this chapter; (2) a credit or deduction under another provision of this title; or (3) any federal credit claimed under this title. REPRESENTATIVE HAWKER asked to parse through the language noting subsection (c) relates to the corporate income tax, but paragraph (1) clarifies that the taxpayer can't take a credit and deduction at the same time. However, paragraph (2) would preclude using the credit under AS 43.20.049 (c) as the basis for a credit or deduction under another provision of this title. He questioned whether a specific exemption is necessary in order to allow the expenditure to be applied to AS 43.56. He pointed out that the language in AS 43.20.049 (c) may have embedded a prohibition against what HB 334 is doing. MR. PAWLOWSKI responded by acknowledging that SB 21 was narrowly crafted last year and the decision to broaden the capability is something the department must carefully think through. REPRESENTATIVE HAWKER commented on how difficult it can be to interpret statutes over time. 2:16:04 PM REPRESENTATIVE SEATON said if an oil company orders something built for them, but the ten percent tax credit can't be used as a deduction for anything else, it would have absolutely no relative value. He asked for an example of how the tax credit [under AS 43.20.049] could be applied. Certainly an oil company wouldn't give away a 25 percent tax credit to manufacture something for the field to subsequently receive a 10 percent tax credit. REPRESENTATIVE TARR stated the as introduced included language that limited the transfer to the initial purchaser of the tangible personal property, but Version U doesn't contain that language. She asked whether the committee should consider including that provision. 2:17:29 PM CO-CHAIR SADDLER held public testimony open on HB 334. [HB 334 was held over].