SENATE BILL NO. 345 "An Act relating to apportionment of business income." ANNETTE KREITZER, staff to Senator Loren Leman, chair, Senate Labor and Commerce committee was invited to join the committee. She said this bill was introduced after an Alaska Supreme Court ruling in State of Alaska vs. OSG Bulk Ships, Inc., Feb. 20, 1998 ruling, which effects a new tax on foreign flagged ships and aircraft shipping goods to and from Alaska. In effect, the ruling would make Alaska the only state taxing the net income of foreign flagged or owned ships, aircraft, railroad rolling stock and communication satellites. SB 345 amended the section of the Alaska Net Income Tax Act which adopted section 883 into Alaska law, expressly stating that nothing in the Alaska tax statutes may be construed as an exception to or modification of section 883 of the IRS code. The purpose of section 883 was not only to prevent the double taxation of foreign income but to insure income earned by U.S. companies was not taxed in other nations. Section 883 upholds a logical concept in international trade. Ms. Kreitzer indicated that the Senate Labor and Commerce committee chair would have no opposition to an immediate effective date clause on SB 345 if the committee desired to make that amendment. There had been suggestion that a severability clause might be necessary. She said further that there had been some questions raised about the constitutionality of the legislation but there were others available to testify regarding that matter. She did say that in going over the matter with the drafter it was his opinion that the Court had never held that the State could not use its money or income in the manner described in the bill. The State gives its own money away to private individuals through the permanent fund dividend program. Senator Adams asked about amendment #1 and the retroactive clause. He said they would have to go back to old records and he maintains that it would make the bill unconstitutional if they did that. Ms. Kreitzer said that Senator Leman did not personally like retroactive clauses but he was willing to leave the clause in this bill because he believes it reaches as far back as the department would conceivably go to collect those taxes. She knows that there have been issues raised as to the unconstitutionality and she briefed the Senator before coming to the hearing this morning. In further response to Senator Adams regarding the constitutionality of the bill she felt she had made Senator Leman's petition clear on the bill. Senator Parnell also addressed some of Senator Adams' concerns and referred to AS 01.10.090 Retrospective Statute, which says no statute is retrospective unless expressly declared therein. Senator Adams felt that this section should be eliminated from the bill because it violated the public purpose of the Constitution. DEBORAH VOGT, Deputy Commissioner, Department of Revenue was invited to join the committee. She further explained in reference to the State Supreme Court decision issued in February 1998. It held that an exemption that is part of Federal law is not incorporated into the State's corporate income tax because it was found that the Federal system of taxation was so different from the State's that their intent in adopting an apportionment system of tax precluded the automatic incorporation of a provision that the Court found was in the Federal statutes for the purpose of avoiding double taxation. She explained that this dispute arose out of an assessment in 1990 for tax years 1979 through 1988. (Tape #116, Side A switched to Side B.) She said this was a good case for the State whether or not this legislation passed for the reason that it indicated our Courts had unanimously decided to respect what it construes the legislative intent concerning Alaska's tax statutes. She also called the committee's attention to a memo from Department of Law regarding the retroactive issue. Referencing comments by Senator Parnell she said it was perfectly legal to make a law retroactive. However, the difficulty with the retroactive repeal of a tax is that it raises public policy concerns. She said the department's fiscal note estimated a revenue loss of approximately $3 million and $8.5 million. She said the range was so broad because they did not have good information from which to draw up a more accurate fiscal note. Senator Torgerson asked if there were any other states taxing vessels. Ms. Vogt said foreign boats and vessels were not being taxed by other states. Senator Torgerson further asked if there was revenue coming in to the State under this provision and Ms. Vogt said no. Senator Torgerson asked if the Anchorage International Airport was classified as a foreign trade zone. Ms. Vogt indicated the tank farm at the airport has been activated as a foreign trade center where foreign carriers are fueled. Senator Adams asked if the revenue loss indicated on the fiscal note was commencing in 1999. Ms. Vogt said no analysis of any retrospective effect had been done. Assuming the legislation passed the Legislature has cut the department's budget to the bare minimum and therefore there was no administrative reason to dedicate any resources to a tax the Legislature had repealed. Therefore, she felt they would not be going out after folks. JOE KYLE advised the co-chair that he was available to respond to questions and did not want to testify. BILL EILANDER, President, Anchorage Convention and Visitors Bureau was invited to join the committee. He said he was representing his board of directors and 1379 businesses that make up the membership of the organization. He said they unanimously supported the passage of this bill. They had been very active in marketing on the international level. Personally he had travelled with the last four governors and members of the Legislature to oversee destinations, i.e. Korea, Japan and Europe in extending Alaska's hand in business. Failure to pass this bill and impose corporate income tax would be severely damaging to Alaska's reputation and of the Administration's. He noted that Korean Airlines had been a very strong ally of tourism and they were the only scheduled foreign air carriers today flying passengers direct from Seoul, Korea to Alaska. He explained their handicap under the Jones Act. Korean Air willingly puts passengers on the aircraft, knowing that when they get off the flight in Anchorage they will have to fly with empty seats to and from New York before they can put passengers on again in Anchorage. Currently they were working with China Air and also other Japanese air carriers to create more direct passenger flights. Northwest Airlines has also recently announced they would fly direct flights Tokoyo- Anchorage which has helped stimulate competition with the foreign carriers. This was good for Alaska and the industry. In response to Senator Adams, Mr. Eilander said he had many questions himself regarding the retroactive clause. He suggested more research needed to be done on how the retroactive clause would work. Other states feel it is a threat. He felt Alaska was making a statement that they were not open for business. He did not think the fiscal note could be big enough to take the risk of any retaliation on the other end if Alaska enforced the tax. PAM LABOLLE, President, Alaska State Chamber of Commerce was invited to join the committee. She said they supported SB 345. The State Chamber did not support any new tax that was not part of an overall long-range plan that had been reviewed and supported by businesses. This is a new tax and is an ad hoc tax. She said it was particularly ill-founded at this time seeing the decrease in oil production and low oil prices. Urgent economic diversification was needed in Alaska. Otherwise there would be a chilling effect on businesses. Alaska's tax laws should be readable and understandable by any citizen and not ambiguous so as to contain implied applications as the Supreme Court maintains exists. The language in SB 345 is clear and precise and removes any ambiguity on the issue. She said the most significant impact on all Alaskans will be the increase in the cost of transportation. She further noted that three other states had tried this tax and it was repealed. She again urged the committee to move SB 345 forward. GREG CHAMPION, General Manager, Sheraton Anchorage Hotel was invited to join the committee. He said their parent company was Korean Air and they had been doing business in Alaska for twenty years. He reviewed some of the business dealings and holdings, including real estate, apartment buildings, catering facilities, laundry and linen companies, the Sheraton Anchorage Hotel; also passenger and cargo flights through Anchorage International Airport. He noted that Korean Air was the largest international carrier at the Anchorage airport, having thirty-six flights per week. He said the total Alaskan employees were about three hundred fifty. He gave a brief history on their connection with the Anchorage International airport. Since 1988 they had only been able to get twelve international carriers back into the airport. He said to impose a tax now would negate all treaties with foreign countries and they in turn would tax us. It would be sad to see Alaska move backwards. BOB STILES, President for Development and Marketing of Beluga Coal Resources was invited to join the committee. He read a brief statement into the record. He urged passage of SB 345. Senator Donley reminded the committee and the testifier that it was the Administration was the one who brought the lawsuit and got the Court to rule on the matter. Not all the blame should be laid on the Court. Mr. Stiles indicated that it was his understanding the way the matter progressed someone at the Department of Law had written an opinion saying the State could tax under 883 and the exemption did not apply. He felt the State and Administration had no choice but to attempt to enforce the matter and if challenged to pursue it through the Courts. Co-chair Sharp noted for the committee and public that there was a 10:30 a.m. time limit on the bill. He had teleconference scheduled for that time on HB 51. SUSAN BURKE, Esq., Law Firm of Gross and Burke was invited to join the committee. She said her services were retained by Northwest Cruise Ship Association to provide legal consultation and assistance on the bill as it was going through the Legislature. She said she did not believe there was a constitutionality problem with the retroactive section. It would have no effect whatsoever on the validity of the prospective provision of the bill. Another section in Title 1, Alaska Statutes, which provided for a presumption of severability if a provision of the bill can stand alone, even if one other section has been declared unconstitutional, that provision stands. She said it was true that retroactive tax repeals and retroactive tax exemptions always raise a question whether they are valid or not. However, if there was a public purpose the Courts will defer to the legislative judgment that there is a public purpose and will uphold the legislation. She cited two California cases in reference. One was an exemption from local sales taxes for sales of geothermal energy (California). The Court held there was a public purpose both in the prospective and retroactive exemptions in encouraging sales of geothermal energy. Another California case regarding assessment practices of oil fields was also cited. Senator Adams asked if she had worked on retroactive clauses in the past that were unconstitutional? Ms. Burke said she basically had worked on both sides of the matter and in fact cited an opinion that she drafted in 1980 that had to do with a proposal to go back and refund past individual income taxes. She said that in her opinion at the time and still today that there wouldn't be a valid public purpose in those circumstances. Senator Adams asked what she would like to see for her clients regarding this bill? Ms. Burke said she would rather the matter not be left up to the Department of Revenue and said the Legislature should make the decision. At this point Co-chair Sharp advised the committee and public that HB 51 would be moved to tomorrow's calendar. JEFF BUSH, Deputy Commissioner, Department of Commerce and Economic Development was invited to join the committee. He said there may be some undue criticism around the table regarding the Department of Revenue and the Supreme Court. The Administration firmly believes the Department of Revenue did the right thing in bringing the litigation and the decision of the Court is a good one. He felt the committee should recognize the decision, also as being a good one. It would allow this body to enact tax provisions and tax laws. He also felt it was important for the committee to pass SB 345 because from a policy point of view it was an important piece of legislation. It was up to the Legislature to make the decision and not the Internal Revenue Service or anyone else at the Federal level. In reference to the fiscal note submitted by the Department of Revenue, he said it was admittedly difficult to analyze the amount of the impact. However, he felt it was insignificant in relation to the amount of potential loss of business to Alaska. It was important for Alaska to maintain a good perception in the international trade arena. He therefore urged passage of the bill. Senator Donley said this was a valid justification for the case, but it did not explain not taking action three years ago to remove the big question of the back tax. He felt the Administration could have proposed this change at least three years ago and the back tax exposure could have been avoided. Senator Pearce said she felt the bill was the right thing to do because of overriding interests of industries such as, timber, natural gas pipeline, oil and mining, seafood processors and the domestic airline carriers that do business overseas. (Tape #116, Side B switched to Tape #117, Side A.) Senator Pearce continued saying the State had been a part of upgrading the fuel facilities, runways, the aprons, the taxiways and put together every single piece to have two world-class cargo facilities and still Alaska had some of the lowest landing fees in the Northwest United States and Canada. They provide excellent service, good fuel, and good weather. She did note for the record, however, that her constituents, along with those of Senator Donley, Senator Leman and Senator Wilken deal with a great more noise with the arrival of the cargo flights. She said she was also one of the lead complainers especially when the carriers did not follow the noise abatement rules set out by the FAA. It was the foreign carriers that were the "bad guys" in breaking this rule rather than the domestic carriers. She noted for the committee that she found it interesting that the same international carriers that were present today asking for the tax break were the same ones that voted "no" on the Anchorage Airport expansion. She said if there was a way to make an amendment that would tax one carrier and not the other she would. Senator Adams MOVED amendment #1. Senator Sharp OBJECTION. Senator Adams explained this would delete line ten on page one. He was afraid there would be a legal challenge. He agreed that Alaska should be open for business but not give the State away. Senator Parnell said from the testimony today companies had reasonably read existing statutes. It permitted them to be exempt from taxation in a manner similar to other states. They have made their investment, created jobs and provided services based on a tax regime they reasonably thought existed. However, it is now understood does not exist according to the Supreme Court. He felt he had heard at least three legitimate public purposes to retain the clause. One, companies would have to pass the costs for back taxes on to consumers; two, there is potential economic retaliation by other sovereigns against our citizens; and three, principals of equity and fair dealings are implicated. Senator Adams said the problem was with not knowing what the amount would be to reimburse companies since 1993. Senator Donley said he thought the testimony was that no one paid during this time. Ms. Vogt rejoined the committee. She said the 883 issue had been raised with taxpayers who are before them for other tax Issues. They have then assessed according to their policies. In some cases the matters are resolved and taxes actually paid. More often the department has asked for a waiver of the statute of limitations pending the outcome of the OSG cases. Senator Donley asked if the department policy would be to refund taxes to those individuals who had already paid? Ms. Vogt said she was not completely clear what would be done. However, that seemed likely. Senator Donley said he would like to know the amount and what the department would do. Ms. Vogt said it may not be possible to identify an exact dollar amount between the State and the taxpayer. Senator Parnell asked about 883 exposure and what was actually being settled with the Department of Revenue. Ms. Vogt said they were settling their tax liability overall. Therefore it is impossible to attribute any particular dollar to any particular issue. The State makes its assessment but it is not always clear there is a meeting of the minds on those amounts. Senator Donley asked if the Department of Law was available but Ms. Vogt said they had a previous commitment. Co-chair Sharp said he was not interested in making any gigantic refunds if there is a possibility of refunds on settlements. He understood from Ms. Vogt that at this time it would be very difficult to tell. He noted amendment #1 was before the committee and there was pending objection. He asked the Secretary to call the roll. By a roll call vote of 1 yea (Adams) and 5 nays (Sharp, Pearce, Donley, Torgerson, Parnell, Phillips) amendment #1 FAILED. Senator Adams MOVED amendment #2. Senator Torgerson OBJECTED. He explained the amendment would provide a sunset on the year 2001. He felt all taxes should come under review. By a roll call vote of 1 yea (Adams) and 5 nays (Sharp, Pearce, Donley, Torgerson, Parnell, Phillips) amendment #2 FAILED. Senator Donley advised the co-chair that he would like to hear from the Department of Law regarding settlement of back taxes. Senator Adams concurred. Co-chair Sharp said this was an important matter to resolve. He HELD SB 345 over to tomorrow's calendar and asked the Department of Law be present. He also reminded the committee HB 51 would be heard first on tomorrow's calendar. SB 344 State Agency Telecommunication Systems was assigned to Senator Parnell and asked that he work on that bill with the sponsor and provide a report back to the full committee. He further outlined the Wednesday morning and afternoon calendars. ADJOURNMENT Co-chair Sharp recessed the meeting at approximately 11:00 a.m. SFC-98 -1- 4/07/98