CS FOR HOUSE BILL NO. 341(FIN) An Act relating to administrative adjudication and judicial appeals and to the informal resolution of certain factual disputes between taxpayers and the Department of Revenue; establishing the office of tax appeals as a quasi-judicial agency in the Department of Administration; revising the procedures for hearing certain tax appeals, including appeals regarding seafood marketing assessments; relating to consideration and determination by the superior court of disputes involving certain taxes and penalties due, and amending provisions relating to the assessment, levy, and collection of taxes and penalties by the state and to the tax liability of taxpayers; providing for the release of agency records relating to formal administrative tax appeals; relating to litigation disclosure of public records; clarifying administrative subpoena power in certain tax matters; and providing for an effective date. Co-chairman Halford directed that CSHB 341(Fin) be brought on for discussion. REPRESENTATIVE JOE GREEN came before committee in support of the bill. He explained that it represents the end product of many hours of work and compromise between members of the oil industry, a staff member from the Dept. of Revenue, and the legislature. The legislation changes the tax appeal process within Alaska. Under present proceedings, the department issues a tax statement. If appealed, it goes to informal review. If resolution is not effected in that review, the applicant can proceed to formal review. If resolution is not forthcoming at that point, appeal may be made to the commissioner. The commissioner decides whether or not he or she wishes to hear the appeal. Thereafter, relief may be sought through the superior court. However, there is no de novo review at the superior court level. There is thus a perceived bias that remains with the state in attempting to resolve differences. That is one of the reasons tax cases have taken so long. The bill would, in effect, establish a tax appeal court. During the interim it was made clear that while tax court may be effective in some states, it is not the best approach for Alaska since the state has large, complex tax cases but not a great many of them. Changes were thus made in the bill to acknowledge that fact. At the beginning of this session, the administration also introduced a tax bill, and there appeared to be a possibility that the two could be combined. While that has occurred, several issues required resolution. Representative Green attested to lengthy hearings and great effort which produced the proposed bill which, he explained, streamlines the tax appeal process. It institutes change in that after informal review within the Dept. of Revenue, a formal review would occur within the Dept. of Administration. Removal to a separate department is intended to remove the perceived bias in prior tax appeals. An additional provision allows the taxpayer to go straight to superior court, following informal review, if a constitutional question is involved. On all other issues, the matter must be pursued through informal and formal reviews. The de novo hearing would take place within the Dept. of Administration. Representative Green voiced his understanding that four amendments would be offered. He explained that most relate to "the procedure to work the process." Others are house cleaning measures to ensure there is no complication between this bill and other legislation. DEBORAH VOGT, Deputy Commissioner, Dept. of Revenue, acknowledged that discussion of moving the tax appeal function out of the Dept. of Revenue had been had on numerous occasions over the years. All past efforts were resisted by the department. A survey of other states indicates that Alaska is in a distinct minority in terms of in-house review with no possible trial de novo after in- house review. While approximately half the states conduct initial in-house tax department review, "a fair number . . . permit the taxpayer to have a trial de novo when they go to superior court." The department, in consultation with a tax advocate, began working on changes per the proposed bill. Ms. Vogt characterized the legislation as good and fair. She said it would remove the perception of bias and should protect both the state and the taxpayer. Ms. Vogt next directed attention to amendments A, B, C, and D. She explained that the first two relate to the Judicial Council. It was agreed that the council would serve as the mechanism for nominating the individual to hold the administrative law judge position. Legislative confirmation would have involved creating an entire board and would have more than doubled the fiscal note. From nominations by the counsel, the Governor would appoint the administrative law judge for a term certain. The judge can be removed only for cause. Protections are thus in place to ensure the independence all parties seek. Following review of proposed language, the Judicial Council made suggestions. Amendment A contains technical amendments relating to procedure. Part of the amendment merely lengthens the time within which the council must do its work. The amendment has been agreed to by the sponsor, oil industry representatives, and the administration. Ms. Vogt said that Amendment B is the most important of the four. It would allow the Judicial Council to begin work immediately after the bill becomes law rather than waiting for the July 1 effective date. That would allow for earlier appointment of the administrative law judge Amendment C provides a technical fix to the agreed-upon provision for a modified, limited, direct appeal to court for constitutional questions raised by taxpayers. These are challenges to the facial validity; no factual issues would be involved. Controversy has arisen over language presently in the bill, and parties cannot agree upon interpretation. Amendment C is intended to clarify that a taxpayer may take an individual issue or claim, if it is a pure constitutional challenge, to the superior court at the same time that factual audit issues are pursued with the administrative law judge. Amendment D changes the time period for appeal to the superior court from 60 to 30 days. Establishment of the time line at 60 days stemmed from comments by a consultant saying that review of state tax law indicates that things would be happening too fast. Concern at this time relates to the fact that the change to 60 days would, in effect, change a court rule. The agreement is to return to the 30- day period set forth in court rules. Senator Rieger directed attention to SCS CSHB 341(Jud) and referenced language at Page 18, lines 9 and 10, and inquired concerning the meaning of the following language: "An appeal of the informal conference decisions under this section is exclusive." Ms. Vogt explained that a direct facial attack on a regulation or statute cannot be taken both to the superior court and the administrative law judge. The taxpayer must choose between the two. However, a taxpayer may spilt his or her case into two segments and place issues of law before the court and factual issues before the administrative law judge as long as the portion that goes to court is "a pure facial challenge to a statute or reg. that needs no factual determination." Ms. Vogt next spoke to several possible interpretations of language to be amended by Amendment C. She also presented an example of operation under the proposed amendment. Co-chairman Halford raised questions regarding ability to accomplish what is necessary by the July 1 effective date. Senator Zharoff referenced the following statement within file materials and questioned its veracity: The present tax appeals process is seriously flawed in practice and denies taxpayers the opportunity to have their tax appeal heard and decided by a truly independent and impartial tribunal. Ms. Vogt responded that the foregoing represents an opinion by the Alaska Oil and Gas Association. It is a perception that taxpayers have always held that the in-house nature of Alaska's tax appeal system is biased against them. She said she did not agree with that statement in that Alaska's system is "very similar to systems all over the world that have been upheld, over and over, by the courts" and have been tested for constitutional fairness. The department recognizes that the perception of bias exists, and it is not going to change until tax appeal is moved out of the department. Further comments followed by Ms. Vogt regarding awkwardness associated with the current role of the commissioner of revenue in tax cases. She stressed that benefits to be derived from the proposed bill include: 1. Increased faith in the system through the perception that the system will be fair. 2. Opportunity for the commissioner to become fully involved from commencement to conclusion. Mr. Vogt voiced her hope that the department would be back before committee, next year, asking for a second hearing officer, due to active use of the new system. The department has settled many cases over the past years rather than proceeding to hearing. Additional cases proceeding through the hearing process will result in published decisions that can be relied on by both taxpayers and auditors. The integrity of the tax system will grow if a body of reliable decisions is in place. In response to a further question from Senator Zharoff, Ms. Vogt said that the decision of the administrative law judge could be appealed to both the superior and supreme courts. Co-chairman Frank referenced accompanying fiscal notes, noted intent to retain present hearing process staff for other duties relating to CSED and permanent fund dividends, and pointed to subsequent need to change the funding source from general funds to interagency receipts. Ms. Vogt directed attention to tabulations (copies on file in the original Senate Finance Committee file for HB 341) evidencing funding sources. Three specialized hearing officers now cover child support, permanent fund dividends, and tax work. Since reorganization, the senior hearing officer has done no tax work because the department is "so swamped with CSED cases and PFD cases that we haven't put out a tax decision in over a year." The department cannot reduce staffing as a result of removing the tax function from revenue. Funding for CSED and PFD work comes from those sources. At the present time, the senior hearing officer is 50 percent general fund, 25 percent CSED, and 25 percent PFD. Funding for the paralegal assistant and administrative clerk is divided into thirds. Current general funds total $76.0. That could be reduced to approximately 10 percent, $18,184.30, for a savings of $58,003.70. Co-chairman Frank asked that the department prepare a new fiscal note based on the foregoing general fund reduction. Ms. Vogt agreed to do so. BOB McMANUS, Vice-president of Tax, ARCO Alaska, next came before committee on behalf of the Alaska Oil and Gas Association. He explained that he had been working on the proposed bill for sixteen years. He spoke from prepared text (copy on file) and stressed that: The majority of the provisions in SCS CSHB 341 (Judiciary) reflect consensus not only within the industry but also between industry and the administration. However, there were also many compromises between the industry and the administration, which are in the bill. Indeed, the last remaining issues of disagreement between ourselves and the administration were resolved in compromise amendments presented to the Senate Judiciary Committee April 19, which that committee adopted. AOGA supports the four technical changes proposed by the department and endorses the bill and requests approval without substantive changes. In response to a question from Co-chairman Halford, Mr. McManus explained that companies pay production taxes monthly. Income tax is paid on a calendar-year basis. Co- chairman Halford expressed a preference for a January 1 effective date for the bill in lieu of adoption of Amendment B. That would provide adequate time within which the Judicial Council could make nominations. He remarked on ongoing tax hearings and suggested that taxpayers would be anxious to "get their hearings into the new process." Senator Zharoff asked if ongoing hearing would be concluded within the Dept. of Revenue or transferred to the Dept. of Administration upon passage of the proposed bill. Mr. McManus explained that the bill contains transition rules. Most of the cases would move into the new procedures. Ms. Vogt referenced language saying that if a taxpayer appeals after the effective date of the act, the appeal is heard by the new administrative law judge. If appeal has already been made, the case remains within the Dept. of Revenue, unless the taxpayer and state agree otherwise. The department has already entered such an agreement with one taxpayer. Ms. Vogt suggested that particular taxpayer would probably not be happy with the January date. There is no problem with effecting the bill in July. Transition provisions allow the administrative law judge to "do other work" until the case load builds up. Co-chairman Halford voiced support for changing tax case procedures but expressed reluctance for change to occur too quickly. Senator Sharp MOVED for adoption of Amendment A. No objection having been raised, Amendment A was ADOPTED. Senator Rieger noted testimony from the department that it could make Amendment B work and MOVED for adoption. Co- chairman Halford OBJECTED. He reiterated that if Amendment B is not adopted, the effective date would be July 1, 1996. Operation of the bill would thereafter be delayed by the 150 days during which the Judicial Council would compile and make nominations. The Co-chairman then called for a show of hands on the motion. Amendment B was ADOPTED on a vote of 4 to 3 (Co-chairmen Halford and Frank and Senator Sharp were opposed.). Senator Zharoff referenced Section 16 (Page 20, lines 17 through 31) and asked if language would be in conflict with legislation restricting state access to certain audit information. Co-chairman Halford advised that the previous legislation dealt with environmental audits rather than tax audits. Senator Sharp MOVED to rescind committee action adopting Amendment B. Senator Zharoff OBJECTED. Co-chairman Halford called for a show of hands. The motion carried on a vote of 4 to 3 (Senators Donley, Rieger, and Zharoff were opposed.) and committee action WAS RESCINDED. Co-chairman Halford then called for a show of hands on adoption of Amendment B. Adoption failed on a vote of 3 to 4 (Senators Donley, Rieger, and Zharoff were supportive.). Senator Sharp MOVED for adoption of Amendment C. END: SFC-96, #97, Side 1 BEGIN: SFC-96, #97, Side 2 No objection having been raised, Amendment C was ADOPTED. Co-chairman Frank MOVED for adoption of Amendment D. Senator Rieger noted that the legislation would apply to all taxpayers, and he questioned whether the proposed 30-day window would be sufficient for taxpayers other than large companies. Deborah Vogt reiterated earlier comments that current bill provisions for 60 days would inadvertently change court rules. Appellate Rule 602 presently provides a 30-day time period for taking appeal from an administrative decision. Co-chairman Halford voiced his understanding that if 60 days remains, and the required two-thirds vote is not forthcoming, the 30-day rules would remain unchanged. Ms. Vogt concurred in that understanding, but also noted need to change the bill title to reflect incorporation of the change to 60 days. It was never the intent to change the court rule, and the court rule change has never been part of the title. Amendment D merely returns the bill to existing requirements. Discussion followed regarding the 60-day time period in the administrative process. Co-chairman Frank renewed his MOTION for adoption of Amendment D. No objection having been raised, Amendment D was ADOPTED. Co-chairman Frank then MOVED to change the effective date to January 1, 1997, and requested unanimous consent. Senator Zharoff OBJECTED and asked for an explanation. Co-chairman Frank said the delay would provide time within which to prepare to implement the bill. Senator Zharoff referenced earlier comments that ongoing cases were posed to move into the new process. Senator Sharp acknowledged comments regarding an agreement to proceed under proposed changes when they become effective. He suggested that the agreement could accommodate the six-month delay and attested to need for 150 days (Amendment A) for proper review and consideration of applicants. Co-chairman Halford directed that SCS CSHB 341 (Jud) be held in committee with the motion for change of effective date pending and that it be brought back before committee at the next meeting. ADJOURNMENT The meeting was adjourned at approximately 6:05 a.m.