HB 141-LEASED VEHICLE REGISTRATION FEE Number 0768 CHAIR COGHILL announced the next item of business would be HOUSE BILL NO. 141, "An Act relating to registration fees for certain leased motor vehicles." Number 0818 REPRESENTATIVE JAMES testified as sponsor of HB 141. She said HB 141 would treat all personal-use vehicles the same regardless of whether they are purchased or leased. That is the issue. Currently, a leased vehicle is considered a commercial vehicle for purposes of license registration in the state. The fee for a commercial vehicle is about double what it is for a vehicle that has been purchased outright. That is not fair. There is a fiscal note for -$540,000, and " I look at that as $540,000 we've been ripping off the people," she said. She thinks the license fee should reflect the use of the vehicle and not the ownership of the vehicle. A personal-use vehicle should be licensed as such regardless of who owns it. Number 0988 MARY MARSHBURN, Director, Division of Motor Vehicles, testified by teleconference. House Bill 141 would reduce the registration fee for leased vehicles from the commercial to the noncommercial rate if the leased vehile is not being used for commercial purposes. MS. MARSHBURN provided a historic perspective. Prior to 1993, all passenger vehicles paid the same registration fee. Pickups could be registered as either commercial or noncommercial; there was a $10 difference in the fee. People evaded the commercial fees by declaring the pickup's use as noncommercial, even if it was registered in the name of a business. In 1993, the legislature changed the law to require that any vehicle that was registered in a business's name would pay the commercial rate. The basic registration fee today is $68 for a passenger vehicle and $78 for a pickup. The commercial fee is $158 for either a passenger vehicle or a pickup. The fees cover registration for two years. MS. MARSHBURN explained that leased vehicles are owned by and registered in the name of a business that profits from their lease. The terms of the lease are negotiated between the leasor and leasee. There is a lease agreement that discloses the fees that are part of the leasing arrangement. The lease agreement is a private contract and DMV is not involved in it. Some of the costs in the lease agreement are negotiable. Number 1327 MS. MARSHBURN said if HB 141 is passed, there would be several effects. (1) The Departmnet of Motor Vehicled (DMV) would not make the assumption of use (whether the vehicle is being used commercially or noncommercially). That would be determined at the dealership at the time of lease. Further, DMV has no way of policing the true use. (2) Reducing the fees for leased vehicles could create inequities for other businesses, such as rental-car companies. MS. MARSHBURN explained how the the fiscal note was calculated. There are about 36,000 passenger cars and pickups under 5,000 pounds now registered commercially in Alaska. The assumption was made, based on national statistics, that one-third of those vehicles are leased. It was further assumed that half of the leased vehicles are used noncommercially, so the revenue loss is projected at $540,000. Number 1501 REPRESENTATIVE JAMES stated her belief that the registration and licensing fees are charged for a vehicle's using the roads. Some people choose to lease vehicles instead of buying them. She doesn't see why a person should have to pay a higher fee for driving a vehicle that is leased instead of purchased. That's the issue. She does not agree with DMV that it would be hard to manage. Number 1619 REPRESENTATIVE WILSON asked what the $540,000 now is used for. MS. MARSHBURN said it goes into the general fund and is avialable to the legislature. Number 1660 REPRESENTATIVE STEVENS sought clarification, asking if it is always the owner who pays for the licensing. Could the leassee purchase the license? MS. MARSHBURN said the vehicle owner always pays for the registration, title, license plates, and any vehicle fees. As a part of the negotiated agreement with the person leasing the vehicle, most or all of those costs are passed on to that person. Those costs are itemized on the lease agreement, and the total cost of the lease is negotiable. REPRESENTATIVE STEVENS assumed that it was not possible for the leassee to pay for the license because that person is not the owner. MS. MARSHBURN said that was correct. For purposes of law enforcement, the name of the person leasing the car is listed on the registration, but the owner is the leasing company. Number 1775 REPRESENTATIVE FATE asked about federal tax implications. He thought many people lease cars to "take the federal tax advantage." Number 1836 MS. MARSHBURN said getting a tax deduction or writeoff might motivate someone to lease a vehicle for business use. REPRESENTATIVE FATE wanted to know if DMV had a record of those people who are leasing vehicles for business use. MS. MARSHBURN said DMV does not have a comprehensive list. It would be listed on the registration if a vehicle is registered in the name of a business. Beyond that, DMV has no way of sorting out those vehicles that are leased for business use. REPRESENTATIVE FATE asked if the state might have any liability under any law as being a party to [federal income tax] fraud. MS. MARSHBURN did not know. The state has no way of policing vehicle use. Number 2002 REPRESENTATIVE JAMES noted that a vehicle used in a business should be registered in the business name. A person could take a federal tax deduction for a vehicle held in his/her personal name if the vehicle is used partly for business and partly for personal use. That is broken down on the tax return form. When she leased a vehicle, the registration showed her name as the "registered owner" and also showed the name of the owner, the company from which the vehicle was leased. She asked Ms. Marshburn, "Don't you have a list of the registered owner, or do you just list the owners?" MS. MARSHBURN said DMV has lists of both owners and registered owners of vehicles, "but we have no way of separating out leased vehicles that are registered in a business name versus a personal name." Number 2134 REPRESENTATIVE JAMES wondered why a person leasing a vehicle couldn't sign a statement that the vehicle was for personal and not commercial use. Then, the onus would be on that person if he/she was not telling the truth, and there would be no responsibility on the part of the state to make that decision. MS. MARSHBURN said that declaration would be made at the dealership, and DMV would need to take the word of the person leasing the vehicle and the dealership as to whether the vehicle was for personal or commercial use. That is why the fiscal note shows no cost, but simply the loss of revenue. REPRESENTATIVE JAMES observed, "But that wouldn't work under the way the law is written today. We would have to change the law to allow those people who lease a vehicle for personal use to be able to have the reduction in the registration fee." MS. MARSHBURN said that was correct. Number 2216 REPRESENTATIVE STEVENS understood that DMV has no way of verifying whether a vehicle is being used personally or commercially. He asked if there is a penalty for someone who claims personal use when the use actually is commercial. MS. MARSHBURN testified that statute allows a $300 fine. The difficulty is determining that that's the case and in enforcing it. "It's a pretty low priority for law enforcement," she said. REPRESENTATIVE STEVENS asked if to her knowledge, it had ever been enforced. MS. MARSHBURN said no. Number 2270 ROBBIE GIINTHER, President, Tip Top Chevrolet, testified by teleconference. He does not think half of the leases are for business purposes. About 95 percent of the vehicles he leases are for personal use. How a car is registered determines the licensing fee. If it is registered to an individual who states that the vehicle is for personal use, that is how the vehicle is licensed and fees are assessed accordingly. If a vehicle is registered in a company name, the fees are assessed at the commercial level. There is no choice in the matter. The fees for licensing are not negotiated. They are passed on to the customer. On the rental forms used at Tip Top Chevrolet, there is a place to indicate the primary use of the vehicle. The customer has to check the correct box and attest to that fact. It seems like a very cut-and-dried issue to him. Individuals should not be penalized by paying a higher license fee just because they choose to acquire a vehicle for personal use through a lease rather than through a purchase contract. Number 2444 REPRESENTATIVE STEVENS understood that 95 percent of the people leasing vehicles from Mr. Giinther were getting them for personal use, yet they still have to pay the commercial fee for licensing. MR. GIINTHER said that is correct. Number 2460 REPRESENTATIVE COGHILL asked how many people who are leasing vehicles end up purchasing them. Number 2460 MR. GIINTHER said the great majority of his customers buy the vehicles they have been leasing. They purchase the vehicle either to keep or to trade in on their next leased or purchased vehicle. Number 2523 MS. MARSHBURN commented that 95 percent seems high, but ackowledged that figure could reflect Mr. Giinther's experience. She said Mr. Giinther is correct that if a vehicle is registered in the name of business, that vehicle is licensed in the commercial category. She clarified that under current policy, if the vehicle is registered in an individual's name, it is licensed as a personal vehicle. But all leased vehicles are owned by the leasing company, and they are therefore registered in the commercial category. MS. MARSHBURN pointed out that although license fees are not negotiable, the contract itself has room for negotiation. Negotiables within it include the price of the vehicle, the price of the lease, and some of the other fees. Number 2599 REPRESENTATIVE FATE asked if the form that contains the check- off list for indicating a vehicle's intended use includes any fine print about a penalty for making a false statement on that form. MR. GIINTHER thought there probably was, but he wasn't certain. The document is an extensive one provided by the automobile manufacturer. REPRESENTATIVE FATE surmised that the document is a very thorough one. MR. GIINTHER said it is. He also confirmed that Ms. Marshburn was correct in saying the price is negotiable in leasing a vehicle, just as it is in purchasing one. Number 2659 CHAIR COGHILL told the committee that the policy call as he sees it is how to provide some relief to those who are leasing, equity with those who are purchasing, within the non-negotiable part of the contract over which the state has authority. Number 2670 REPRESENTATIVE WILSON thought it boils down to the leasing company itself paying the license fee, but then passing it on to the person who is leasing the car, "and we're dealing with people who don't want to have that built-in expense." MR. GIINTHER said he hadn't had many complaints from customers. The fee is "relatively invisible" because it is a small portion of the amount people pay when they intially lease the vehicle, he said. When the first license renewal comes due in two years, "it's a heck of a shock to those customers to have to come up with ... $158 dollars." CHAIR COGHILL observed that when the fee comes due, reality sets in. Number 2770 REPRESENTATIVE WILSON asked if that is disclosed in the lease agreement. Could she negotiate a payment adjusted to accommodate the license fee? MR. GIINTHER said the lease payments are for the same amount each month. REPRESENTATIVE WILSON asked if when the license is due for renewal, the fee would be paid directly to DMV and not to the leasing company. MR. GIINTHER said that was correct, just as it would be for any vehicle. MS. MARSHBURN confirmed what Mr. Giinther had said about people noticing the amount when they get the license renewal notice for $158. As he pointed out, it has all been disclosed and acknowledged in the contract the customer signed. He is also correct that one could not negotiate the monthly payments. But knowing that she was going to be faced with $158 in license fees, she would negotiate that in the price of the vehicle. She compared it with an individual's selling a vehicle that has a year left on the registration, and therefore calculating the value of that unexpired into the sales price of the vehicle. Number 2867 REPRESENTATIVE STEVENS did not think it was fair for the state to be charging a commercial license fee for a person who leases a vehicle for personal use. He asked if there was anything DMV would do if HB 141 were to pass. MS. MARSHBURN thought the responsibility would be on the leasing company. She said DMV would notify the leasing companies and the auto dealership association of the new, lower fee that would be charged for licensing of personal-use vehicles. Some sort of declaration of use would need to be included in vehicle lease agreements. REPRESENTATIVE STEVENS wondered how a vehicle would be licensed if it is used for both personal and commercial purposes. REPRESENTATIVE JAMES said the correct way to do it would be to buy a commercial license. She thinks there are many people with vehicles registered in their personal names who are "writing it all off" as a business expense on their income tax. "But that is a different issue altogether," she said. "If they're cheating, that doesn't have anything to do with these people [leasing personal-use vehicles] who are being overcharged." TAPE 01-18, SIDE B REPRESENTATIVE JAMES said there are many people leasing vehicles for personal use and she thinks they are being overcharged by the state. It is not fair for them to have to pay more for a license just because they chose to lease instead of to buy a vehicle. That is the whole point of HB 141. Number 2855 MYRNA McGHIE, Staff to Representative James, came forward to testify. She noted that IRS form 2106 is used to declare personal vs. business use. It is filled out by an employee who has to use his/her personal vehicle for buiness use. Number 2834 MS. MARSHBURN said that if the 95 percent figure estimated by Mr. Giinther is correct, there would be a revenue difference of $972,000 as a consequence of HB 141. CHAIR COGHILL NOTED that that was a consideration, but not so much for the State Affairs Committe as for the Finance Committee. Number 2807 REPRESENTATIVE WILSON wanted to clarify that passage of HB 141 would change the license fee to reflect the registered use (personal or commercial). REPRESENTATIVE JAMES said that was basically correct. Currently, the amount of the fee is based on ownership. If a leasing company owns the vehicle, that vehicle is charged the commercial rate. She thinks that if when registering a vehicle, one had to sign under penalty of perjury that this was for noncommercial use, "I'll bet there wouldn't be a lot of cheaters out there." If that were to be done, she thinks the increase in revenues resulting from truthful registration would offset the decrease from HB 141. CHAIR COGHILL commented, "And once you sign your name, your whole reputation is on that signature." REPRESENTATIVE FATE moved to report HB 141 out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, House Bill 141 was passed out of the House State Affairs Standing Committee. CHAIR COGHILL declared a brief at-ease.