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 fifth hearing for this bill in the Senate Finance Committee. Co-Chair Wilken informed that this legislation addresses a State sales tax. Senator B. Stevens moved to adopt CS SB 366, Version 23-LS1051\Z as the working document. There being no objection, the Version "Z" committee substitute was ADOPTED as the working document. Senator B. Stevens explained that the committee substitute incorporates the following changes: in Section 17, on page six, lines 17-21, language is inserted that would allow communities "to levy and collect specific sales or excise taxes" on categories to include single events such as a car rentals and fish taxes. This language reads as follows. Sec. 17. AS 29.45 is amended by adding a new section to read: Sec. 29.45.655. Specific taxes on property and services. Unless otherwise prohibited by law, a municipality may levy and collect specific sales or excise taxes on single categories of tangible and intangible property or services, such as bed taxes, car rental taxes, and fish taxes. Senator B. Stevens pointed out that another change is incorporated into the bill in Section 29 (c) on page ten, lines 14 and 15, as follows. (c) The rate of the sales tax is three percent of the sales price. The rate of the use tax is three percent of the purchase price. Senator B. Stevens also noted that new language exempting communities with a population of less than 500 "from any of the provisions included in this bill" is inserted in Section 29, subsection 43.44.020 Exemptions. on page 12, lines 15 and 16, as follows. (16) sales, leases, or rentals made in a municipality or unincorporated community with a population of less than 500. Senator B. Stevens also noted that a new provision in added in Section 29, Article 3. Administration of Tax., subsection 43.44.310 Relationship to municipal levies. on page 20, lines 10-13, that would allow the Department of Revenue to contract with the local municipality that currently have an existing tax office. This language reads as follows. (d) The department shall have sole responsibility and authority for the administration of taxes levied under this chapter, AS 29.45.650, and 29.45.700. The department may contract with a municipality to provide a field office for that municipality 's geographic area of the state. Senator B. Stevens communicated that the committee substitute would establish a termination date for the legislation to be effective as of July 1, 2013, as denoted in Sec. 37 on page 26, lines 12 and 13. Senator B. Stevens opined, "that this is a fiscal proposal that would generate revenue." He noted that while the Department of Revenue has not yet provided a fiscal note specific to this new committee substitute, it is estimated that a three percent State sales tax would generate approximately $250 million, with $166 million of that to be designated for the State and with approximately a $85 million return to communities. He identified the exemption of communities with less than 500 residents as "the largest exemption provided to date." He noted that this exemption would exempt 87 of the 164 incorporated communities that currently levy taxes. Senator Bunde asked the rationale of exempting communities of less than 500, as, he attested, many of those communities rely on the State for a number of services including education support. Senator B. Stevens responded that the reason for the exemption is that these communities "are the most vulnerable." He noted that the tax that might be collected in those communities "is not worth the fight." PHELAN STRAUBE, Staff to Senator Ben Stevens, further noted that most of the communities consisting of 500 residents or less "have high prices for goods" as previously pointed out by Senator Hoffman and Senator Olson; however, he continued, most of the goods and services purchased by those communities' residents are from larger communities such as Bethel, Fairbanks, and Anchorage, and therefore, he attested, "the sales tax would still be collected." Senator Bunde voiced concern for "a counter-intuitive incentive" in that communities might not grow in order to avoid the tax in the future. Senator B. Stevens disclosed that there have been interesting discussions in this regard. He stated that the original argument was that requiring small communities to pay a five-percent tax would force commerce outside of the State. He declared that now that it is being proposed to exempt those communities, "the discussion has transformed into saying "oh, that's a good idea because you still capture those people because they spend all their money in Anchorage…or the local hubs in their regions anyway.'" This argument, he contended, indicates, "that they don't spend money outside of the State in the first place." Senator Bunde shared that some small communities with 1,000 citizens are decrying that placing a sales tax on top of their local sales tax would encourage citizens to conduct business with communities of less than 500 residents. Senator Olson asked the cost incurred to the State to generate that $250 million in gross sales tax revenue. Senator B. Stevens stated that page two of the Department of Revenue indeterminate fiscal note, dated March 31, 2004 indicates that an on-going operational expense of $5.9 million would be required to provide for 79 full-time positions. He stated that this is an estimate and does not account for the new provision that would allow the State to contract with local municipalities to provide the service. He concluded that while the effort would cost money, it would generate money. Senator Bunde agreed "that whatever the cost, there would be a net gain to the State." Senator Olson asked for verification that the proposed tax would now be three percent rather than four percent. Senator B. Stevens confirmed that this committee substitute would reduce the tax rate from four percent to three percent as indicated in Sec. 29, subsection (c) on page ten, lines 14 and 15. Continuing, he noted that the amount contributed to the community or the Rate that "would be returned to the community" would remain the same, as specified in Section 29, Article 3. Administration of Tax. Subsection (b) (1), (b) (2), (b) (3), and (b) (4) on page 19, beginning on line 23 through page 20, line 4 which read as follow. (1) less than three percent, the department shall remit the amount of the tax levied by the municipality; (2) at least three percent but less than four percent, the department shall remit the amount that would have been collected in the municipality if the sales and use tax had been four percent; (3) at least four percent but less than five percent, the department shall remit the amount that would have been collected in the municipality if the sales and use levy tax had been five percent. (4) five percent of more, the department shall round up to the next whole number and remit the amount that would have been collected in the municipality if the sales and use tax levy had been that whole number; for example, if a municipality levied a sales and use tax at the rate of five percent, the department shall remit the amount that would have been collected under a six percent levy. Senator B. Stevens stated that, "in reality, one-third of the revenue collected by the State would be returned back to the community." He noted that those communities that do not collect a sales tax would not receive a percentage. Senator Olson asked whether exemptions might apply to the rental and sale of real estate as related to language in Section 29, subsection (d) on page ten, line 16 that reads as follows. (d) The maximum tax on a single sale, lease, or rental is $60. Senator B. Stevens responded that the sale, rental, lease, or construction of real property are exempt from the sales tax in communities of less than 500 residents. Senator Hoffman asked for further clarification of this matter by asking in regards to the taxes on a five-year home lease agreement. Senator B. Stevens declared that it would be exempt from the tax. Senator Bunde moved to report the committee substitute from Committee with individual recommendations and accompanying "pending" fiscal note. There being no objection, CS SB 366 (FIN) was REPORTED from Committee with an indeterminate fiscal note, dated May 7, 2004, from the Department of Revenue.