CS FOR SENATE BILL NO. 277(RES) "An Act relating to the tax levied on pollock processed by a floating fisheries business; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Senator Austerman, the bill's sponsor, explained that this bill addresses inequitable taxes on the fish processing industry whereby some processors pay more tax than others. He stated the federal American Fisheries Act (AFA) created this situation. Senator Ward asked what entities would lose money if this bill were enacted. BRETT FRIED, Economist, Department of Revenue, stated the Department's fiscal note, dated 3/20/02, anticipates the State losing between $333,000 and $400,000 in revenue. He stated this "range" presentation is the result of confidentially concerns. Senator Ward questioned if other entities, in addition to the State, would loose money under this legislation. Co-Chair Kelly clarified that communities would also lose revenue, as half of any revenue the State collects from these taxes is re- appropriated to them. Senator Ward theorized that if the State received $300,000 from the fish processors' tax, communities would receive $150,000 of that amount; therefore, if the State collected $300,000, the net loss to the State is actually $150,000. Mr. Fried concurred with Senator Ward's comment that the legislation would incur a net loss to the State and also reduce the rebate amount available to communities. AT EASE 9:50 AM / 9:54 AM KRIS NOROSZ, Icicle Seafoods, informed the Committee that Icicle Seafoods is a Petersburg, Alaska corporation established in 1965. She stated Icicle Seafoods supports the committee substitute for this bill, as "the purpose of the bill is to ensure that all pollock processors pay the same tax rate to the State of Alaska." She noted that in 1998 the AFA, passed by Congress, "changed the complexion of the pollock industry." She reminded the Committee that the State of Alaska has a three percent Fisheries Business Tax on shore-based processing facilities, and in the 1990's the State passed a Fishing Resource Landing Tax which placed an additional three percent tax on all fisheries resources "processed by an off- shore floating facility and landed in the State." Ms. Norosz continued that the AFA, sponsored by Alaska's U.S. Senator Ted Stevens, was enacted to: "Americanize the fishery"; "rationalize" the industry; settle long-standing disputes on fish allocations for off-shore and on-shore fishery sectors; and restrict the number of "players" that could participate" in the fisheries. She stated the AFA also allowed the State of Alaska to tax all Pollock industry participants. She stated this allowed Alaska to impose a three percent Fisheries Resource Landing Tax on the entire Pollock industry even though they "never operated or brought product" into State waters. She noted this resulted in increased revenues to the State. Ms. Norosz stressed only two floating pollock processors are qualified under the AFA to process Pollock, and they are subject to a five percent Fisheries Business Tax (FBT) by the State. She explained to the Committee the FBT has a differential tax allocated to processing plants on-shore or floating offshore plants within three miles of Alaska's shores. Ms. Norosz stated this bill seeks "to create a level playing field" of three percent for all pollock processors under the AFA. She stated Icicle Seafoods is currently paying a five percent tax and the additional percentage makes "it very difficult to start out your season knowing that your costs are going to be higher than any of your competitors when you are competing in same market to sell that product in." Co-Chair Kelly asked for confirmation that if a processor "is tied up at the same location for one year," they would qualify for the three percent level. Ms. Norosz responded that under the Fisheries Business Tax, a floating processor could quality as an on-shore facility with the three percent tax if they are "permanently affixed to the land or they can stay in one location for the entire tax year." She elaborated these definitions make it difficult to perform required maintenance, repairs and inspections to the vessels for safety and environmental considerations. Co-Chair Kelly inquired as to why a vessel could not operate as a stationary processing vessel in Dutch Harbor. Ms. Norosz explained that Icicle Seafood's processor, the Northern Victor, has a site-specific waste discharge permit from the U.S. Environmental Protection Agency (EPA) that restricts its operating locations. She stated there is no available space for the Northern Victor in Dutch Harbor, and it is "highly unlikely" they would be able to get a permit for Dutch Harbor as the harbor is suffering from air quality standard problems. Co-Chair Kelly inquired if the five percent State tax issue could be amended in this bill to allow a vessel to qualify for the three percent one-year stationery tax status with provisions to allow for movement for routine maintenance and inspection. Ms. Norosz clarified that Co-Chair Kelly is addressing changing the definition to "allow movement for periodic repairs and maintenance," and inspection, but not to allow for processing in other locations. Co-Chair Kelly confirmed that is the intent. Ms. Norosz stated changing the definition in this manner would be acceptable to Icicle Seafoods. Senator Austerman, referring to the AFA provision allowing the State of Alaska to implement a Resource Landing Tax, asked how much money this tax has raised for the State. Mr. Fried did not have that information. Senator Austerman asked the Department of Revenue to provide the amount to the Committee. Senator Ward asked if the AFA limits the number of operating pollock processors. Ms. Norosz responded the AFA restricts the number of pollack processing facilities and identifies qualifications. She continued the AFA specified a fixed number of on-shore processors and identified the factory trawlers and their "mother ships." Senator Ward asked if the number of permitted factory trawlers could be increased from two to three. Ms. Norosz stated the AFA limits the number to the current two, and the only way for a new entity to enter the pollock market would be to purchase one of the current two floating facilities, purchase an existing on-shore plant, or purchase an eligible existing factory trawler. Senator Ward asked if there is a value placed on these permits. Ms. Norosz expressed the difficulty in establishing values as each facility has different capacities, equipment, and the like. Ms. Norosz described the transaction process involved when Icicle Seafoods bought into the pollock fishery in December of 1999, the year following the enacting of the AFA. Senator Ward asserted that when Icicle Seafoods bought into the pollock fishery the tax was five percent. Ms. Norosz stated that is correct. Senator Wilken characterized the AFA as dividing the pollock fishing industry into three sectors: "the off-shore catcher- processor, the mother ship processing at sea, and the on-shore plant." He asked which tax level the offshore catcher-processor sector pays to the State. Ms. Norosz replied that sector pays a three percent tax because there is an additional fisheries resource landing tax. Mr. Fried stated these taxes are not cumulative. Senator Wilken asked what tax is placed on the "mother ship." Ms. Norosz responded the "mother ship" pays three percent. Senator Wilken, noting the on-shore sector also pays three percent, questioned how the five percent tax is levied if all three defined sectors pay a three percent tax. Ms. Norosz clarified that the two floating Pollock processors are assessed the fisheries business tax as they are considered part of the on-shore sector, and they pay five percent because of existing state law. Senator Wilken asked in which of the three sectors the two aforementioned vessels are classified. Ms. Norosz replied the vessels are considered part of the on-shore sector. Senator Wilken verified they are not considered offshore catcher processors or mother ships, but are rather "sub-sets" of the on- shore processors. Senator Wilken inquired about the process used to determine which tax is levied. Ms. Norosz stated that floating pollock processors are defined as vessels "that are not permanently affixed to the land or that doesn't stay in one location for the entire tax year." Senator Wilken inquired if this definition applies to the two vessels holding the permits. Ms. Norosz confirmed it does. Senator Wilken asked if a facility affixed to the shore is required to pay local taxes. Ms. Norosz stated they would be if a local tax were in effect. Senator Wilken asked if an offshore facility that is limited to staying in one place for one year would have to pay a local tax. Ms. Norosz replied it would be if the vessel were located within a local taxing district. She continued that municipalities and boroughs have differing local tax structures. SFC 02 # 38, Side B 10:09 AM Senator Wilken asked if the two permitted vessels operate within a local taxation area. Ms. Norosz responded that Icicle Seafoods' vessel is located outside of a local taxing district; however, Trident Seafoods' vessel does pay a local tax. Senator Wilken clarified that Trident would pay the State-mandated three percent tax as well as the local tax. He furthered that under this bill, Trident would only be required to pay the three percent "so haven't we just flip-flopped that inequity." Ms. Norosz responded that those who are operating on-shore and paying local taxes also receive benefits such as fire and police protection, access to utilities and garbage service from those communities. She continued that dock and harbor space is also made available to them. Ms. Norosz informed the Committee that Icicle Seafoods is required to pay $300,000 for a moorage system in addition to paying for a water line to the ship. She stated that Trident Seafoods pays a one percent local tax. She reiterated that Dutch Harbor has a two percent local tax and since taxes vary from community to community, there could not be equity. She opined that to create equity, the State could regulate the local taxation rates. Ms. Norosz summarized this bill as requesting the State charge an equal rate to all Pollock processors. Senator Wilken understood Ms. Norris to be requesting leveling out the vessel tax at three percent, whereby the monies that Icicle Seafoods pays for services at its location would equate to the monies an on-shore processor pays in local taxes for similar services. Ms. Norosz replied yes, on-shore processors are paying for services that Icicle Seafoods is not receiving. Senator Austerman stated "mother ships" pay the three percent state tax and do not pay local taxes. Co-Chair Donley commented that the different rates being charged by communities do not appear to be the problem because different services are provided. He continued that ships operating outside of a taxation district would likely use services at the nearest facility or community. DAVE BENSON, representing Trident Seafoods Corporation, testified offnet to voice the Corporation's support for this bill. He stated this legislation would correct the situation whereby Trident Seafood's vessel, the Arctic Enterprise, and Icicle Seafoods' vessel, the Northern Victor, "pay a two percent higher tax rate than other Pollock processors in the State." Mr. Benson stated that the current State Raw Fish Tax for shore based pollock processors and factory trawlers is three percent, and shore-based Pollock processors additionally pay local taxes where applicable. He stated the Arctic Enterprise pays the five percent state tax and a one percent local tax for a total of six percent. Mr. Benson stated Trident Seafoods has "no issue with the local community taxes;" however requests the State "to offer parity on the State fish tax." He continued this legislation "is a surgical fix affecting only two processors." Mr. Benson stated the AFA identified the three aforementioned sectors and allocated fish harvesting rights to those with a history in the pollock fishing industry. He noted the AFA provided the State of Alaska the authority to tax pollock harvesters fishing in federal waters. Mr. Benson commented earlier State legislation placed a three percent landing tax on offshore processors; however, the AFA mandates that all pollock offshore processors are subject to the three percent State tax. Mr. Benson stated this mandate brought equity to all Pollock processor sectors except the two stationary floating processors considered part of the on-shore sector under the AFA. He stressed this bill "simply brings the overdue parity to include the Arctic Enterprise and the Northern Victor at the three percent state fisheries business tax that the other sectors are now paying." Mr. Benson informed the Committee that floating processing vessels have the advantage of being able to process fish in various locations throughout Alaska, and during a year move to various locations and process pollock, cod, crab, herring and other species. Mr. Benson clarified the two mobile floating processors would continue to pay a five percent tax on all non-pollock species they process. He commented the distinction between these two floating processors and others is that these two vessels, by federal law, process pollock in a single geographic location throughout the entire year and cannot take advantage of the ability to change locations when it would be more efficient to do so. He stated that if the State reasons that mobility is an asset and levies a higher tax based on that, Trident Seafoods would concur; however currently the Arctic Enterprise and the Northern Victor do not have that advantage since they are required to process pollock in a single location. He concluded this legislation "simply equalizes the Fisheries Business Tax rate with the other shore side processors and the Landing Tax" that shore side processors are subject to in the pollock industry. Mr. Benson clarified that an earlier question asking if changing the definition of factory trawlers to "allow movement for periodic repairs and maintenance," and inspection, but not to allow for processing in other locations, would not benefit Trident Seafoods situation because their vessel, the Arctic Enterprise, also processes salmon in another location during the year. Senator Ward asked if Trident Seafoods owned the vessel, the Arctic Enterprise, in 1998 when the AFA was enacted. Mr. Benson stated that Trident Seafoods purchased the Arctic Enterprise in July 1999. REPRESENTATIVE CARL MOSES informed the Committee the Northern Victor processing vessel's original owners purchased the vessel with the intent to avoid paying property and sales taxes to the Municipality of Unalaska. He opined the Northern Victor and the Arctic Enterprise's current owners purchased the vessels at a purchase price that factored in the five percent floating processor tax as both vessels were purchased after the five percent tax went into effect. Representative Moses stated; however, he is sympathetic to the inequity in these and other fisheries taxes and voiced support for levying an across-the-board five percent tax with credits allowed for any municipality property taxes that are levied. Representative Moses commented that the State's current ability to collect a landing tax from all processors is questionable as it pertains to fish caught outside the three-mile limit; however, the fishing industry has agreed to pay the tax without requiring a court decision. He stated it might be difficult to raise the landing tax to five percent because of the question as to the State's jurisdiction. Representative Moses noted the State taxes salmon cannery processing activities at 4.5 percent. Representative Moses stated numerous communities within his District would lose the rebate money if this bill were enacted. Senator Leman asked how communities receive the rebate money if the processor is not located within their boundaries. Representative Moses informed the Committee the tax portion identified for the rebate program "is pooled" and distributed to communities involved. Senator Leman asked for clarification whether the pool of rebate money is divided amongst the affected communities or all the communities in the program. Representative Moses stated it is distributed to all communities in the affected area. Senator Leman, referring to the credit Representative Moses suggested for municipality levied taxes, asked how payments in lieu of taxes for water, garbage and the like, might be addressed. Representative Moses opined that numerous fishermen attempt to avoid paying taxes, but still use a community's facilities such as the landfill. He continued that processing vessels generate significant waste that is deposited in these landfills. Senator Leman ascertained that most landfills have a fee structure in place to recoup costs of providing services. Representative Moses responded the rates are not adequately charged. He informed that federal law mandates that any place with a dock is required to receive waste from any vessel that uses the dock, and it may be provided at no charge to the vessel. Senator Ward suggested that if taxes were reduced, the fishing industry would have more disposable income to benefit communities and employees. Senator Austerman confirmed that the State tax monies collected from vessels operating outside of a defined local district are pooled and rebated to communities in the common area. He informed the Committee that if this bill were enacted, Kodiak would lose approximately $10,000 and Unalaska would lose approximately $60,000 in rebate monies from that pool. Senator Austerman reminded the Committee this bill addresses the State tax on fisheries and that a vessel's location is a separate issue. He stated the Unalaska City Council voiced a neutral position on this bill. Representative Moses stated the Aleutian East Borough could lose approximately $170,000 in rebate monies. Co-Chair Kelly ordered the Bill to be HELD in Committee.