SENATE BILL NO. 83 "An Act relating to the corporation income tax; and relating to the computation of interest under the look-back method applicable to long-term contracts in the Internal Revenue Code." 9:14:08 AM Senator Bishop MOVED to ADOPT the proposed committee substitute for SB 83, Work Draft 28-LS0634\U (Bullock, 3/27/13) as a working document. There being NO OBJECTION, it was so ordered. CHRISTINE MARASIGAN, STAFF, SENATOR KEVIN MEYER, discussed the change in the CS. She noted that on ppage 1, line 11 the retroactive effective date was changed to January 1, 2013. SENATOR PETER MICCICHE, SPONSOR, read from a prepared statement. He explained the legislation. He communicated that in addition to its focus on corporate income tax, the bill was about fairness and simplicity. He detailed that currently for state and federal corporate income tax purposes contractors undertaking large multi-year projects such as highways, schools, and universities were required to estimate their total profit on a project and to pay income tax on the portion of the project completed in a given tax year. He stated that it was impossible to predict in the first year of the project what the actual cost or profit would be. Upon completion of the project and once the profit amount had been determined, the contractor filed look-back taxes (an amended return). A contractor either owed additional taxes or received a refund based on whether the profit had been over or under estimated; interest was owed on the additional taxes due. Senator Micciche relayed that although the Internal Revenue Service (IRS) code had a specific provision for over and under payments of estimated taxes for the multi-year projects, existing state laws considered the payments delinquent and applied an 11 percent interest rate. The state made no distinction between its system of estimating taxes based on a contractor's best knowledge and a tax payer who did not make a timely filing. He believed there should be a distinction between a tax penalty on delinquent taxes and an amended return. Conversely, the bill would tie the interest rate to a recognized index as opposed to the 11 percent interest currently paid by the state and contractors in the current outdated system. Senator Micciche expounded that the bill corrected the interest issue, simplified the process for contractors, and adopted the IRS bulletin rates for look-back taxes on long- term projects allowing contractors and the state to use the same interest pay schedules for state taxes as the federal system. Currently the interest rate was 2 percent for under payments when the profit had been underestimated and over payments when the state owed money in the amount of $10,000 or less; interest was currently levied at 0.5 percent on amounts greater than $10,000. The rate fluctuated and was published quarterly. The CS specified the tax policy bullet would be in effect for the 2013 calendar tax year. He communicated that the bill would primarily impact Alaska C corporation contractors, lenders, and surety bonding companies; it would ultimately allow for greater cash flow that would be reinvested in Alaska's communities. He pointed to several letters of support (copy on file) from general contractors, the Association of General Contractors, bankers, public accountants, surety or bonding brokers, and other. He opined that the legislation was beneficial for the state, private sector businesses, and Alaskans and it was an issue of fairness. Senator Olson asked whether there was any opposition to the bill. Senator Micciche was not aware of anyone who opposed the modernization of the state's interest rates. Senator Olson inquired about the administration's position. Senator Micciche responded that he could not speak for the administration, but believed the Department of Revenue (DOR) was in support of the bill. 9:19:30 AM Vice-Chair Fairclough OPENED public testimony. IDONNA PEIPER NELSON, CFO AND PARTNER, PRINCIPLE DAVIS CONSTRUCTORS AND ENGINEERS INC., spoke in support of SB 83. She believed that the issue was not previously addressed due to the complexity of the issue. She stated that the interest rate was assessed on a tax that was difficult for the taxpayer to understand or was even aware of. She explained that a large contractor was defined by the federal government as a contractor bringing in $10 million or more per year in revenue; most contractors fell into that category. When a contractor began a fixed-fee job, they did not know exactly how profitable it would be; risk was reduced as the project progressed and more became known about exact costs. Typically contractors started out with conservative cost estimates; each year the contractor's current estimate was applied to the amount of revenue they had and taxes were paid on the total amount. Ms. Nelson communicated that the legislation would allow contractors to pay taxes retroactively once actual costs were known. The objective was to make everyone "whole." She detailed that if a contractor was not conservative in the early years of a project they would lose the respect of their banker, bonding company, shareholders, and others involved in the project. She furthered that because taxes were paid and income was reported based on estimates, it was crucial that estimates were conservative and that a gain was shown by the project's end. She stated that a good contractor would always have look-back taxes and an ethical contractor always paid taxes owed on time. She stressed that Davis Constructors was never delinquent in its tax payments. She opined that the high interest rate intended to deter companies from making late tax payments was fairly insulting. Ms. Nelson continued to discuss the company's work and its contribution to the state. She conveyed that any additional profits that would result from decreased interest on look- back taxes would flow back into the business. She discussed that federal rates charged on look-back taxes were designed to recognize that the factor was out of the contractors' control. Under the circumstance, the federal government allowed businesses to pay the same interest rate that it paid a tax payer who had overpaid taxes. She relayed that an unethical contractor could technically make interest money from the federal and state governments by overestimating its ultimate profits. 9:28:11 AM JOHN MACKINNON, EXECUTIVE DIRECTOR, ASSOCIATED GENERAL CONTRACTORS OF ALASKA, ANCHORAGE (via teleconference), spoke in support of SB 83. He emphasized that the bill would bring the interest rate on the taxes due in-line with current rates and would fluctuate with the federal rate, which could change quarterly. The bill would separate the look-back provision and interest on the taxes from other sections of the code that were considered delinquent taxes. He stressed that the taxes due were a result of an amended return and were not delinquent. He believed the bill helped level the playing field for C corporations and other types of corporations. Vice-Chair Fairclough CLOSED public testimony. Vice-Chair Fairclough addressed the indeterminate zero fiscal note from DOR. She pointed to the analysis on page 2 of the fiscal note, which point out, which indicated that approximately 50 percent of the corporations in Alaska would qualify. Changes in revenues were indeterminate. Co-Chair Meyer supported the legislation. He MOVED to REPORT CSSB 83(FIN) out of committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSSB 83(FIN) was REPORTED out of committee with a "do pass" recommendation and with a new indeterminate fiscal note from the Department of Revenue. 9:31:57 AM AT EASE 9:36:17 AM RECONVENED