SENATE BILL NO. 261 An Act relating to municipal sales and use taxes involving air carriers; and providing for an effective date. Co-chair Pearce directed that SB 261 be brought on for discussion and referenced the Senate Community and Regional Affairs Committee Substitute; sponsor statement; fiscal notes; opposition papers from the Alaska Municipal League, Haines Borough, and City of St. Mary's; a position paper by the air carriers in support of the bill; and information from both the FAA and U.S. Dept. of Transportation. The Co- chair further directed attention to a work draft committee substitute (8-LS156\R, Cook, 3/11/94), proposed by Senator Sharp, as well as a proposed letter of intent. Senator Sharp MOVED for adoption of CSSB 261 (Fin), "R" version, for discussion purposes. No objection having been raised, the "R" version of CSSB 261 (Fin) was ADOPTED. Senator Sharp explained that CSSB 261 (Fin) adds the word "air" before transportation in title language at page 1, line 1, and within the body of the bill at line 10. That ensures that the legislation addresses air transportation rather than auxiliary transportation provided by an air carrier on the ground. The new draft also adds subsection (b) to the previously included (e) under 49 U.S.C. App 1513. That section reassures that municipalities may continue to charge property taxes, income taxes, franchise taxes, and sales and use taxes on the sale of associated goods and services provided by air carriers. It further reassures that the right of municipalities or other political subdivisions that own or operate airports to levy or collect reasonable rental charges, landing fees, or other service charges from aircraft operators is not infringed upon. The Senator spoke to past efforts to tax passenger fares and freight in intrastate commerce. The intent of federal legislation, as evidenced in recent court rulings, is that that is not allowable. The proposed bill clarifies federal law. Senator Sharp further noted deletion of the retroactive clause from previous versions of the bill and advised that CSSB 261 (Fin) would become effective immediately. Senator Kelly referenced information from the Haines Borough indicating that the borough applies a sales tax on intrastate freight. He then asked if the bill would impact ability to continue to collect the tax. Senator Sharp concurred that it would. He reiterated that the purpose of federal legislation is to ensure that regional areas do not add costs within their particular area that would be transferred outside the region in terms of freight and passenger service. Senator Kelly pointed to language within the position paper stating that the FAA Act of 1958 does not prohibit municipalities from assessing the sales tax. Senator Sharp advised that federal law is clear. He suggested that if the Haines sale tax is challenged, the borough might face return of tax moneys. Such a tax tips the economic balance of shipping freight and passengers between locales on federally certificated airlines. Senator Kelly voiced discomfort over "stripping" the tax from the borough. CRYSTAL SMITH, Alaska Municipal League, came before committee in opposition to the bill. She refuted comments that the bill merely clarifies federal law. Statements embodied in correspondence from general counsel, U.S. Department of Transportation, and court rulings indicate that the proposed bill would go beyond federal law in prohibiting municipalities from levying a sales tax on the carriage of freight. Ms. Smith directed attention to language within the League position paper and noted comments by Alaska Superior Court Judge Jonathan M. Link in Homer Air vs. Kenai Peninsula Borough et al. The preliminary ruling indicates that Section 1513 of the Federal Aviation Act does not prohibit sales tax on the transportation of freight. Ms. Smith noted instances where municipalities have attempted to impose such a tax and were told by air carriers that the tax was contrary to federal law. Given the financial resources of a small municipality versus the air carriers, the municipalities have, in most cases, backed down. However, the Haines Borough is successfully levying a tax, based on opinions from city attorneys, per information from the FAA, that the tax is allowed under federal law. The situation at St. Mary's whereby the city seeks to place a sales tax on shipments of raw fish through the local airport brought this issue to the fore. Air carriers are fighting the tax which would provide approximately $100.0 in revenue to the city. The city is presently negotiating with air carriers. Passage of the proposed bill would render the issue moot. Ms. Smith reiterated opposition to the bill, advised that issues surrounding freight are not clear, and requested that the matter remain open. She acknowledged that fiscal notes evidence little impact. The proposed bill involves "one of those prospective things where you're cutting off an option for municipalities to impose a tax that might help them in times of other declining resource situations." Senator Sharp asked if information from the Alaska Municipal League was made known to House members furthering similar legislation. He also asked that he be provided information from the FAA (evidencing that the Haines tax is legal) and inquired concerning how much revenue had been collected up to this time. Ms. Smith explained that she spoke with the city clerk and treasurer prior to consideration of the bill in the House. She acknowledged that she did not, at that time, have anything in writing from the Haines Borough. She further referenced correspondence from the FAA to the City of Yakutat and from the U.S. Department of Transportation to counsel for a number of small municipalities indicating that "taxes on the intrastate air carriage of property are permissible." Senator Rieger asked if all commercial air carriers are federally certificated. Senator Sharp voiced his understanding that federal law applies to all federally certificated airlines and those operating under FAA regulations. That would include "everybody that has a commercial license." HAROLD JONES, City Council Member, next testified via teleconference from Bethel. He voiced opposition to the bill and support for the position taken by the Alaska Municipal League. Bethel is considering an ordinance for a use tax on alcohol. Air freight is the only means by which alcohol, sold in Anchorage and elsewhere, is brought into Bethel. While the tax will be upon the consumer, the city is reviewing the possibility of having the air carrier collect the tax for remission to the city. Bethel spends approximately $1.4 million on its police department each year. The town of 5,000 is the hub village for 25,000 people. The tax base consists of a 5% sales tax. The proposed use tax would help offset some of the losses in revenue from the state. The city is looking specifically at a use tax on alcohol because it is the cause of many problems. Since the airlines are bringing alcohol into Bethel, it seems logical to have them collect the tax on those who ship it. Senator Rieger asked if the city assesses dockage fees for water transportation into Bethel. Mr. Jones advised that the port is a state facility. He added that the city imposes wharfage and dockage fees. Senator Rieger suggested that a similar fee be levied at the airport. Mr. Jones said the city intends to tax the product rather than the freight. There is concern that the proposed bill will prevent collection of the use tax. Mr. Jones noted that the state has "complete jurisdiction over our airport;" the city is not involved. Senator Sharp voiced concern over selective taxation of a particular commodity. He then asked what would prevent other communities from levying a similar tax. As an example, he asked what would happen should Anchorage levy a 5% sales tax on all freight leaving the municipality. The prime purpose of the bill is to prevent one region from jeopardizing the economic shipment of freight to another region within the state or between states. That is the thrust of federal legislation. CARRIE WILLIAMS, former City Manager of St. Mary's, next spoke via teleconference from Anchorage. She voiced concern over lost revenues to bush communities resulting from prohibiting sales and use taxes. Speaking specifically on behalf of St. Mary's, Ms. Williams noted past receipt of raw fish taxes from fisheries in the area. Those revenues have now been lost. Rural communities have had to maintain police departments and roads and have nominal revenues. St. Mary's has a $2.5 million budget. Loss of ability to tax freight service on the 5,200 tons of raw fish shipped out of the community would total $88.0. The contention is that use of the airport for shipment is a basic service of the community. A small roadhouse, restaurant, and lodging facility pay a sales tax. Airlines derive a benefit from revenues. Just as ground taxi service is a taxable entity in St. Mary's, air taxi operations and freight should also be taxed. There is no distinction between that and wharfage fees for use of the dock. Ms. Williams observed that in discussion with air carriers, the carriers are not able to adequately defend the fact that intrastate trade is tax exempt. City attorneys have not found referenced cases particularly adequate in defense of carrier contentions. Bush communities are asking that they be allowed to tax, at local rates, sales of services out of their communities. The tax at St. Mary's is intended to recoup lost raw fish tax revenues and cover the impact on airports and community services. TIM TROLL, City Administrator/City Attorney, Sand Point, Alaska, next testified via teleconference from Anchorage. He voiced support for the position of the Alaska Municipal League. He reference a recent Anchorage Daily News article which indicates need for the proposed legislation to avoid potential litigation brought by the fact that city administrators "are always looking at this area as a possible source of new revenue." Mr. Troll suggested that the legislation would lead to more litigation because it will create a "whole new area of state jurisprudence as to exactly what was meant and how extensive this particular provision would go." Will it prohibit Bethel from levying a use tax on alcohol imported into the community? Mr. Troll suggested that if the position of air carriers is that the proposed bill merely makes clear what is already clear in federal law that freight service is exempt, perhaps the bill should simply state: Notwithstanding other provisions of law, a municipality may not levy or collect a tax or fee on the transportation of individuals or goods by a federally certificated air carrier, except to the extent allowed by 49 U.S.C., Sec. 1513 (b). Subsection (b) is the language communities claim authorizes state and political subdivisions to "at least look at the area of freight as a possible source of taxation." Mr. Troll suggested that action on CSSB 261 (Fin) would result in passage of bad law and special interest legislation. It would further restrict municipalities that are receiving less from the state and being told to be more responsible locally. Mr. Toll suggested that the legislature review methods to even the tax load rather than pass bad legislation. He noted that most states have a state sales tax which alleviates the problem of intrastate taxes among communities. A level playing field might include a state tax that is shared back with municipalities. That would be precluded if the proposed bill is passed. End: SFC-94, #30, Side 1 Begin: SFC-94, #30, Side 2 REED STOOPS next came before committee on behalf of the Alaska Air Carriers Association. He voiced support for the legislation. He explained that while federal law is clear as to what is and is not taxable in commercial aviation, the benefit of the proposed bill is to avoid additional litigation. Mr. Stoops directed attention to correspondence to and from the U.S. Department of Transportation. He noted language in October 2, 1986, correspondence from the department indicating that taxes on passengers and interstate freight are not permissible. That is intended to prohibit regulation of interstate commerce--a normal federal preemption. Further, federal taxes on those services accrue to the federal airport trust fund, and trust funds are returned to states for airport improvements. Alaska is a beneficiary of the system. The state actually collects more in trust funds than it pays in taxes. The only area that general counsel indicated might be eligible for taxation is intrastate air freight. Subsequent to the correspondence, the circuit court in Florida ruled that intrastate air cargo is also exempt from taxation. Federal law is clear. Litigation costs for both municipalities and air carriers should be avoided. The proposed bill would be beneficial to that end. Speaking to the situation at Haines, Mr. Stoops observed that the fiscal note from the Dept. of Community and Regional Affairs indicates nominal collection of tax. The air cargo tax is not being paid by one or two of the three carriers into Haines. By virtue of the Florida decision, the tax could easily be overturned. Mr. Stoops voiced his understanding that the City of Bethel seeks to levy a tax on alcohol coming into the community. He noted that Anchorage sales taxes would cover the sale at the point of origin, and air freight taxes are prohibited by law. It would thus not be appropriate for the air carrier to collect the proposed tax. Addressing comments by the city administer of Sand Point, Mr. Stoops suggested that the bill is written as suggested. It specifically references municipal taxation under "113(b)." That was at the suggestion of the Alaska Municipal League. Federal Code section "113(b)" speaks to areas in which municipal or state taxes can be collected. It is not the intent to deny municipal collection of legal taxes such as landing fees, fuel flowage fees, fees on airline meals, or fees on indirect services. Mr. Stoops reiterated that it is not the intent to deprive municipalities of collection of legal taxes under federal law. Mr. Stoops advised that federal certificates referred to in the legislation encompass Part 101 certificates for scheduled air carriers and Part 135 certificates for air charter operations. Crystal Smith again came before committee on behalf of the Alaska Municipal League. She referenced February 5, 1993, correspondence from general counsel at the U.S. Department of Transportation and noted that it was issued subsequent to the Florida decision. It reiterates the position that a state tax and, by extension, a municipal tax may be levied on intrastate transportation of air property. The issue is not as clear cut as air carriers would have one believe. Senators Rieger and Kerttula requested copies of the 1993 correspondence. Co-chair Pearce called for additional discussion of the bill. None was forthcoming. She then queried members regarding disposition. Senator Sharp MOVED for adoption of the proposed letter of intent, advising that it clarifies that the intent of the bill is to "make state law exemptions for what the federal law states." No objection having been raised, the letter of intent was ADOPTED. Senator Sharp then MOVED that CSSB 261 (Fin) pass from committee with individual recommendations, accompanied by the letter of intent and three fiscal notes. Co-chair Pearce called for a show of hands. The motion carried with only Senator Jacko objecting. CSSB 261 (Fin) was REPORTED OUT of committee with the Senate Finance letter of intent, zero fiscal notes from the Dept. of Transportation and Public Facilities and Dept. of Community and Regional Affairs, and a municipal fiscal note from the Dept. of Community and Regional Affairs indicating minimal loss. Senator Sharp signed the committee report with a "do pass" recommendation. Co-chairs Pearce and Frank and Senators Kelly, Kerttula, and Rieger signed "no rec." Senator Jacko signed "Do not pass."