SENATE BILL NO. 366 "An Act relating to the levy and collection of sales and use taxes, to the levy and collection of municipal sales and use taxes, and to municipal sales and use taxes on alcoholic beverages; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this bill, which is sponsored by the Senate Finance Committee, would institute a statewide four-percent sales tax on sales, lease, rental, and use of tangible property and services within the State. Senator B. Stevens moved to adopt committee substitute, Version 23- LS1051\U as the working document. He then objected to the motion in order to explain the changes in the committee substitute. Co-Chair Wilken noted that Kathryn Kurtz, Legislative Counsel, Division of Legislative Legal and Research Services, has provided a Version "U" Sectional Analysis [copy on file], dated March 24, 2004. Senator B. Stevens stressed that this is a working document and as such would continue to evolve over time. Changes in Version "U" include: the addition of three new sections to the list of limitations on the powers of Home Rule municipalities to Section 5, on page two, beginning on line seven. Co-Chair Wilken interjected that numerous individuals have indicated the desire to testify regarding this bill. Senator B. Stevens expressed the understanding that this would be a Committee work session with the goal of developing a new committee substitute based upon Department and Member input. Therefore, he asked that the hearing be limited to Committee discussion. Co-Chair Wilken apologized for not clarifying that this hearing would be a work session, as it is the bill's first hearing and "a foundation on what we are talking about" must be established. The Version "U" committee substitute was distributed to the public with the understanding that public testimony would be taken at a later date. Senator B. Stevens explained that some of the changes incorporated into the committee substitute would address concerns presented by State departments, specifically the Department of Revenue. However, not all of the concerns have been addressed, as this is a continuing work in progress. In addition to changes in Section 5, other changes include: language in Section 12, page three, line 27, that would allow municipalities to adjust their local tax system in order to qualify for the one-percent return the State would rebate to the municipality; language in Section 16, subsection (7) on page five, line 29 would provide an exemption for goods for resale by the mining and manufacturing industry was added because it was inadvertently omitted in the original committee substitute; the reference to a local bed tax, were it separate from the local sales tax, as specified under AS 29.45.700, in Section 16, subsection Sec. 43.44.060. Relationship to municipal levies. on page six, line 29 would allow it to remain in place; language in Section 16, Sec. 43.44.060, subsection (c) on page seven, beginning on line 18 would address the situation of two different taxation rates resulting from a city within a borough by combining the two rates and then splitting the revenue rebated to that taxing regime proportionately between the two entities. Senator Hoffman asked for further information regarding how the State's one-percent tax rebate would be split between a municipality and a borough. Senator B. Stevens responded that the one-percent rebate would be divided between the two entities depending on their individual tax levies. A five-percent tax on behalf of the local entities would be collected were a municipality to levy a two-percent tax and the borough to levy a three-percent tax. One percent of the five percent tax would be rebated and prorated proportionately between the two. Senator Hoffman understood therefore that the language specifically defines how the split would occur as opposed to it being an optional situation. Senator B. Stevens responded that this would be the guideline for any community that that a dual city/municipality taxation system. Senator B. Stevens explained that other changes in Version "U" include language in Section 16, Sec. 43.44.130. Authority to enter streamlined sales and use tax agreement. on page nine, beginning on line nine that "would permit the State to enter into a multi-state sales agreements for catalog sales," and, were any agreement to occur on the federal Congressional level regarding Internet sales, this would allow the State to participate in that agreement. In addition, this language would allow the purchase of a large ticket item that is taxed in one of certain participating states to be exempt from taxation in Alaska. He noted that this would prevent "dual taxation," and he noted that these types of agreements currently exist between some states. Senator B. Stevens further explained that some issues not addressed in this committee substitute include whether or not to establish a sales tax limitation; or whether or not to exempt such things as industrial equipment that is used in development or exploration or transportation expenses as exampled by taxing items shipped on the Alaska Railroad that would probably be taxed again when sold at the retail level. He voiced support for exempting both of these components. Another issue not addressed is whether or not to incorporate penalties for non-compliance or non-enforcement language. Co-Chair Wilken asked whether Version "U" addresses the entirety of the Department of Revenue concerns as detailed in the Department's March 19, 2004 memorandum [copy on file] signed by Deputy Commissioner, Steve Porter, and addressed to Senator B. Stevens. Senator B. Stevens responded that Version "U" addresses most but not all of the concerns. Efforts on how to address the remaining concerns are continuing. PHELAN STRAUBE, Staff to Senator Ben Stevens, informed the Committee that efforts are continuing in regards to incorporating into the bill, language, as suggested by Senator Hoffman, that would allow a small business to withhold from submitting a tax every 30 days as required, until such a time that the tax owed amounted to a minimum of $250. Senator B. Stevens noted that another area requiring further discussion would pertain to a sixty dollar per transaction limitation, specifically how it would affect existing local revenue streams. He also noted that language exempting wages and interest from taxation was also inadvertently omitted from the bill's exemption list. Senator Bunde asked whether the intent of the bill is to limit the collection of tax to only those entities holding a State business license as enforcing collection of the tax on such things as garage sales would be an administrative nightmare. Senator B. Stevens responded that Section 16, subsection (6)(A) on page five, beginning on lines 25 would exempt the resale of property if a purchaser resells the property, by itself or in combination with other property, "in the ordinary course of business." Senator Hoffman stated that such things as garage sales could also be exempted by language in Section 16, subsection (3) on page five, line 17 that would exempt "occasional sales." Senator B. Stevens concurred. Senator Hoffman asked about his request to provide a senior citizen sales tax exemption in the bill. Senator B. Stevens responded that while this issue was discussed, it was determined that the municipalities that currently exempt senior citizens from taxation could address this on the local level by utilizing the one-percent rebate to assist seniors or by providing them a tax credit. Senator Hoffman stated that he would support a senior citizen tax exemption. For clarification, he pointed out that while one of his requests was to exempt diesel fuel utilized in the generation of electricity, the language in Section 16, subsection (5) on page five, line 22, that exempts "the sale of natural gas, diesel fuel, heating oil, water, electricity, steam, or refuse and garbage collection service" would serve to exempt diesel fuel in its entirety. He voiced that his suggestion limited the diesel fuel exemption whereas the language as written would serve to provide a disparity between gas users and diesel users. Senator B. Stevens acknowledged the comment and stated that this exemption would be revisited. Senator Dyson opined that the endeavor to exempt industrial machinery would be difficult as it would be a challenge to provide this exemption to a specific industry such as the oil industry and large construction projects but not consider exempting such things as commercial fisherman or fish processors. Senator B. Stevens responded that this had been considered without resolution. However, it should be noted that while the four percent tax might apply to every purchase, there is a maximum $60 tax limit. This "ceiling," which could be described as an invoice sales tax rather than an itemized sales tax, was included in the bill in an attempt to address this concern. Senator Dyson acknowledged the explanation. Senator Olson asked how the tax would be applied to harvesters of products, be it either fishermen harvesting from the sea or farmers harvesting potatoes who might sell their products either on a wholesale or retail basis. Mr. Straube interjected that were a fisherman to purchase cans that would be utilized in the process of his harvest, the purchase of those cans would be exempt from the sales tax. Manufacturing components would also be exempt from taxation under provisions of this bill. Senator B. Stevens continued that, the concept "is that any item that is either sold or purchased in the process for total resale is exempt." A borough would have the ability to implement a landed raw fish tax, whereas the State would have the ability to tax the final product where that product sold in the State. This sales tax would not apply to a product manufactured in the State but sold outside of the State. Co-Chair Wilken suggested that the word "sewer" be added to the list of exemptions in the aforementioned Section 16, subsection (5) on page five, line 22. Senator B. Stevens agreed that some of the activities specified in that section might not be owned by a municipality. Co-Chair Wilken affirmed that this is the case in the City of Fairbanks. Co-Chair Wilken asked regarding the status of the bill's fiscal notes. Senator B. Stevens responded that the adoption of the Version "U" committee substitute would provide the Department of Revenue with significant information with which to develop a fiscal note. However, he requested that development of the fiscal note be delayed until a new committee substitute that encompasses the items that were inadvertently omitted from Version "U" is developed. Co-Chair Wilken suggested that a separate estimate be developed that would depict how much sales tax would be lost were senior citizens exempted. Senator Bunde asked the anticipated annual expense of administering the program, as he was concerned that these expenses might outweigh the revenue the tax would generate. Senator B. Stevens understood that the Department has calculated those figures. ROBIN WILSON, Tax Division, Department of Revenue, testified via teleconference from an offnet site and stated that while the Department would work with Senator B. Stevens to develop a fiscal note, it could not provide one at this time as the Committee has some important decisions yet to make. The Version "U" committee substitute has not been reviewed by the Department and language regarding such things as the tax limitation could complicate the development as it would affect costs. She assured however, that once the exemption structure is clarified, a fiscal note would be developed. Senator B. Stevens withdrew his objection to the committee substitute, with the understanding that a new committee substitute would be provided in short order. There being no further objection, the Version "U" committee substitute was ADOPTED as the working document. Co-Chair Wilken asked that the handout titled "State Sales Tax Issue Primer" [copy on file], dated March 2004, that was developed by the Alaska Municipal League (AML) be explained. KEVIN RITCHIE, Executive Director, Alaska Municipal League, voiced appreciation for the Committee's endeavors to address the State's fiscal dilemma by considering a variety of revenue generating options including a State sales tax. SFC 04 # 56, Side A 10:39 AM Mr. Ritchie stated that the AML would be available to assist the Committee in this endeavor. He noted that the intent of the "State Sales Tax Issue Primer" is to examine some of the impacts that would result were a State sales tax implemented as well as to acknowledge that this State is different from other states. Since Statehood, even when times were tough, sales taxes have been reserved to be a municipal tax, as it is recognized that many small communities do not have any other viable option through which to generate revenue aside from property taxation. He also noted the wide costs of living variations in the differing regions of the State is a consideration in this issue. Mr. Ritchie noted that in response to questions pertaining to revenue sources, AML would first recommend the use of the earnings of the Permanent Fund and the adoption of the Percent of Market Value (POMV) Program. Mr. Ritchie declared that a "direct partnership" between municipalities and the State must be sought regarding the development of the fiscal notes, as the exemption list provided in the bill is "a huge issue" that would affect both the State and municipalities' sales tax revenues. He noted that the Kenai Peninsula Borough and the City and Borough of Juneau currently are the largest sales tax collection organizations. Mr. Ritchie concluded his remarks by stating that AML would be available to answer questions regarding the Sales Tax Primer and would welcome participation in the continuing development of the bill. Co-Chair Wilken voiced appreciation for AML's assistance, the Primer, and the suggestion to develop a Sales Tax Exemption Commission. Senator Olson assumed that from "the negative approach" presented in the Primer that AML has a negative view of the State Sales Tax. He asked whether the exemption approach would be more palatable to municipalities were it to mirror exemptions currently in place at the local level. Mr. Ritchie responded that each area of the State is different and that difference is reflected in each area's specific exemptions. Beginning on page 16 of the Primer, there is a definition and an overview of various communities' tax exemptions, and in short, there are no common or uniform tax exemptions. He also clarified that this non-uniformity also pertains to the tax limitation as some municipalities have a limit on a total invoice while others might apply it to a single purchase. Senator B. Stevens complimented Mr. Ritchie and AML on the information provided in the booklet. Continuing, he spoke to the issue as depicted on page ten of the Primer in the section titled "A State Sales Tax in Not Fair to Alaskans" which bases its anti- tax position on the fact that the price of goods in rural communities is substantially higher than that of urban communities. While labeling this as a major policy call, he declared that he has "yet to rationalize within my mind" a justification as to why it is acceptable on the local level to tax products to fund local government but it is labeled "unfair" for the State to tax those same products. On the same subject, he noted that urban areas use property taxes as a mechanism through which to fund government. He noted that the State provides goods and services, including education, "at a equal level" to all areas of the State be it urban or rural. Senator Bunde opined that the information on this page intimates that the proposed Sales Tax would be unfair due to the fact that because the price of an object such as milk is more expensive in one area of the State, the purchaser would be required to pay more tax. Continuing, he recalled testimony to the affect that, in one areas of the State, a Permanent Fund Dividend check equates to approximately 30-percent of the household income. Therefore, were an income tax implemented, that area of the State would be paying little or no income tax while another area of the State would be paying substantially more. He opined, however, that the income tax scenario is fairer than the sales tax scenario. Senator Hoffman, furthering Senator Bunde's comments, stated that what is relevant in an income tax scenario is that everyone in the State is treated equally whether they are in an economically depressed area or not. The problem with a State sales tax is that the State would be receiving additional dollars from communities where the price of things such as milk is higher. This differs from the local tax scenario in that everyone in the community would pay the local government the same tax amount. He stated that there is fairness in a local sales tax as the individuals living within those boundaries are treated equally. In conclusion, he agreed that Rural areas would be treated unfairly were a Statewide sales tax implemented. Senator B. Stevens proclaimed that these discussions would continue; however, he argued that the State sales tax would be fair because it would be applied equally in all parts of the State regardless of the different pay scales, expenses, and other amenities. A State sales tax would be the most equitable thing that could be applied across the State and furthermore, the areas that are more affluent, spend more money and therefore would contribute more money. Senator Hoffman declared that it would be fair to tax on a per gallon basis rather than a price per gallon basis. Therefore, whatever one consumes, one pays for whether it be marine, aviation, or motor fuel. He recognized this as being a fair taxation method as opposed to the inequities presented by a State sales tax based on price. Senator Olson noted that contrary to State programs that provide cost of living allowance considerations for the price of services or employment, private business employees are not provided these benefits. Senator B. Stevens countered that private industry employees would also not have the option to not pay local sales or property taxes on such things as rent. Senator B. Stevens stated that a new committee substitute would be forthcoming. Co-Chair Wilken stated that an opportunity for public testimony on this bill would be forthcoming. Co-Chair Wilken ordered the bill HELD in Committee.