SENATE BILL NO. 122 "An Act relating to the Multistate Tax Compact; relating to apportionment of income to the state; relating to highly digitized businesses subject to the Alaska Net Income Tax Act; and providing for an effective date." 2:31:16 PM Co-Chair Olson relayed that the committee had heard SB 122 on April 17, at which time the committee had taken public testimony. The committee had worked with the sponsor and the Department of Revenue (DOR) and had a Committee Substitute (CS) to consider. 2:31:37 PM SENATOR BILL WIELECHOWSKI, SPONSOR, relayed that he was in support of the changes in the CS. Senator Kiehl MOVED to ADOPT proposed committee substitute for SB 122, Work Draft 33-LS0663\H (Nauman, 5/2/23). Co-Chair Olson OBJECTED for discussion. 2:32:21 PM KEN ALPER, STAFF, SENATOR DONNY OLSON, explained that the CS had taken a portion of SB 14, an oil and gas tax bill that was heard earlier in the week, and put it within SB 122. The portion put into SB 122 was related to non- corporations and the requirement to pay something comparable to corporate income tax for all oil and gas business entities. The section was put within SB 122, which was also a corporate income tax bill and related to internet businesses. He noted that the rest of the changes proposed in the CS conformed to the larger change and made some technical corrections that had been brought to light by DOR. Mr. Alper noted that the first 20 pages of the bill were amendments to the multi-state tax compact and were the same as the original version of the bill. The content had to do with the market-based sourcing provisions, which made sure that the location of the sale in Alaska was what was used for the purpose of the sales factor of a corporate portion. Mr. Alper addressed a Summary of Changes document (copy on file): 1) Adds Section 2, new AS 43.20.019, which establishes a 9.4% tax on income over $4 million per year on "oil and gas entities" other than corporations. 2) Adds Section 3, amending AS 43.20.030(a), the filing requirement in the current corporate income tax, to add other oil and gas entities. 3) Adds Section 4, amending AS 43.20.031(i), describing the accounting method used for companies with activity both inside and outside the state, to add other oil and gas entities. 4) Adds Section 9, amending AS 43.20.144(h)(2), to add other oil and gas entities to the definition of a "consolidated business." Mr. Alper noted that he had inadvertently omitted a description of new language added to Section 11(e) on page 25, line 9. The so-called single-factor apportionment, which was a core portion of the original bill, stated that highly digitized entities would use a sales factor rather than the payroll or property factor. It had been clarified that the section would not apply to a public utility or telecommunications company. The companies would continue to use the three-factor apportionment in current law. He noted that he would make an amended version of the document for public record. 2:35:53 PM Mr. Alper continued to address the Summary of Changes document: 5) Adds Section 12, amending AS 43.20.340 to add two new definitions for "entity" and "oil and gas entity." 6) Adds a new subsection to Section 13, an uncodified applicability section, to confirm that the new tax sections apply to an oil and gas entity with taxable income over $4 million from a source in the state, for a tax year beginning on or after January 1, 2023. 7) Adds Section 14, an uncodified transition section, to confirm that the 2023 taxes are not due until the regular due date for 2023 taxes, October 1, 2024. Because of the retroactivity, any penalties and interest for late payment are waived. 8) Adds Section 15, an uncodified regulations section, to authorize the Department of Revenue to draft regulations that are retroactive to the effective date. 9) Adds Sections 16 and 17, which have the retroactive January 1, 2023 effective date for the "oil and gas entity" tax and an immediate effective date for the uncodified sections. Mr. Alper commented that the underlying bill and single factor apportionment was for the most part unchanged, with the exception of adding the piece about telecommunications companies. The main change was adding the oil and gas entity tax to the legislation. 2:37:59 PM AT EASE 2:38:41 PM RECONVENED Co-Chair Olson invited the sponsor to comment on the CS. Senator Wielechowski commented that he supported the CS as it was written. Senator Wilson spoke to the original bill, which was related to the multi-state compact. He thought oil and gas taxes were different, and wondered if the subjects were related enough. Senator Wielechowski explained that the bill related to corporate income tax, and he thought it was more important for the S-corporation provision to be added. He thought some would agree with the addition, and some would disagree. He noted that the committee was discussing the bill rather than discussing passage of the bill. Senator Wilson felt that the provision should be separate item from the original bill. 2:40:43 PM BRANDON SPANOS, DEPUTY DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE (via teleconference), thought the CS seemed to do what the sponsor had stated. Co-Chair Stedman thought it would be nice to know if the department supported the bill. Mr. Spanos had not been informed whether the bill was supported by the governor and therefore the Tax Division of DOR was neutral on the bill. Co-Chair Olson WITHDREW his OBJECTION. Senator Merrick OBJECTED. A roll call vote was taken on the motion. IN FAVOR: Bishop, Kiehl, Hoffman, Olson, Stedman OPPOSED: Merrick, Wilson. The MOTION PASSED (5/2). The CS for SB 122 was ADOPTED. 2:42:44 PM MELISSA PATACK, VICE PRESIDENT AND SENIOR COUNSEL FOR STATE GOVERNMENT AFFAIRS, MOTION PICTURE ASSOCIATION (via teleconference), explained that the members of the Motion Picture Association (MPA) were the major producers and distributers of movies, television programs, and streaming series; and were the owners of most of the national broadcast and cable networks. She emphasized that she was speaking about the issue of how income was apportioned for national broadcast and cable networks was about the way to tax the networks rather than the amount paid. She explained that market-based sourcing, as proposed in SB 122, taxed companies on their revenue from customers. Ms. Patack cited that broadcast and cable networks had three types of customers and sources of revenue: individuals that were subscribers to streaming services, licensing customers, and advertising customers. She explained that revenue from the customers would go into the Alaska sales tax factor. She contended that the direct relationships between the broadcasting cable networks and customers could be verified and made it easier to administer the system for the taxpayer and DOR. She noted that Mr. Alper had described market sourcing as taxing on the basis of the location of the sale. Ms. Patack continued her testimony. She considered that the taxing of broadcast and cable networks on the income earned from direct customers was consistent with SB 122s market- based sourcing. She thought the method was the modern approach that many states had adopted through statute, such as Illinois and Tennessee. She referenced the audience method of taxing broadcast networks, which had been adopted in the 1990s. She asserted that the industry had undergone significant changes since the adoption of the audience method and that the method would lead to uncertainty in the administration of the tax system. She relayed that MPA had provided suggested language to be added to the bill. Senator Bishop asked about the recommended changes submitted by Ms. Patack. 2:46:30 PM AT EASE 2:49:26 PM RECONVENED Co-Chair Olson requested that Mr. Spanos comment on the testimony offered by Ms. Patack. Mr. Spanos affirmed that he listened to Ms. Patacks testimony. Co-Chair Olson asked Ms. Patack to restate her concern. Ms. Patack referenced submitting amendment language in a document from the Motion Picture Association dated April 17, 2023 (copy on file). The language would allow for market sourcing by customer location for broadcast and cable networks. Co-Chair Olson asked Mr. Spanos if he had a copy of the letter with the suggested amendment language. Mr. Spanos affirmed that he had seen the letter. He relayed that the division's position was that nuances had previously been handled in regulation, which allowed for pivoting quickly with changes in industry. He thought that the issue could be handled through regulation. He thought the regulations Ms. Patck mentioned could be a starting point and could be modernized. He did not identify anything in the letter that was problematic. Co-Chair Olson summarized that Mr. Spanos was indicating there was nothing in the MPA letter that could not be handled with regulation. Mr. Spanos answered affirmatively. 2:52:16 PM Co-Chair Stedman thought it was possible that regulations could result in the different implementation than contemplated in the statute. He suggested that the committee consider modified language in the bill to ensure the regulations were in line with what the committee was thinking. Senator Wielechowski understood that the department could fix the problem referenced by Ms. Patack if it chose. He referenced the question regarding the administration's support of the bill. He could not speak to whether the administration supported the bill, but could speak to the fact that the the highly digitized part of the bill was a provision suggested by former DOR Commissioner Lucinda Mohoney to the Fiscal Policy Working Group. The sponsor had worked with the department to craft the bill language. He recounted that the former commissioner had testified to the working group that the governor would support the provision. Senator Wielechowski referenced committee discussions regarding the S-corporation change, and recalled that former Commissioner Mahoney had testified to the Senate Finance Committee that the administration was planning to introduce changes to fix the S Corp loophole. He recounted that the loophole was created when Hilcorp had acquired BPs assets. He recalled that the administration had a similar provision to what was in the bill. He summarized that there had been indications of support for both provisions in the bill. 2:55:12 PM Senator Wilson asked about S-corporations, and commented that the committee had not heard testimony or presentations from industry or the Regulatory Commission of Alaska regarding whether the costs would be passed on and cause rate changes. Senator Wielechowski understood that Hilcorp would testify on Friday, and suggested that Senator Wilson query the company. He stressed that Hilcorp was currently threatening to withhold production or development or exploration in Cook Inlet. He furthered that the state had contracts that were expiring because Hilcorp was refusing to invest, develop and produce under the terms of the contract it was legally obligated to do in Cook Inlet. He thought Hilcorp should be questioned about whether it would continue to invest on the North Slope and why investment was reduced from $847 million in 2014 to $220 million the previous year. He pondered why the state was providing over $500 million in oil tax credits when Hilcorp was only investing $220 million. He queried factors such as Hilcorp's rate of return, internal rate of return, and net present value. He stressed not basing decisions based on hyperbole and statements that had no foundation. Senator Wilson clarified his statements were not in defense of any entity. Rather, he wanted to know the effects on users of the system if the S-corporation statutes were changed. Senator Bishop suggested that the commissioner or a designee addressed questions when the bill was considered in committee in the future. He referenced a fiscal plan that had been discussed by the administrator. He wanted to know whether the administration was committed or not. He was not interested in passing more tax legislation without a commitment from the administration. Senator Wielechowski thought Senator Bishop had posed a great question, and would love to see the administration come out in support of the bill after previously expressing support for the provisions. He noted that Hilcorp was not a utility and therefore was not regulated by the RCA. 3:00:31 PM DAVID DUNSMORE, STAFF, SENATOR BILL WIELECHOWSKI, wanted to follow up on Senator Wielechowski's comments addressing Senator Wilson's concerns. He understood that there were no regulated utilities that would be non-corporation oil and gas entities. He cited that the RCA did have oversight over gas sales agreements between regulated utilities. He furthered that it would not be possible for the RCA to pre- judge a proposed contract. In the past the RCA had looked at market price conditions, and he thought it was unlikely that the changes proposed in the bill would be a factor in deliberations. Senator Wilson understood that Hilcorp was not a utility, but shared a concern that contractual gas of sales to providers could change rates of service. Senator Wielechowski emphasized that Hilcorp had taken out a lease with terms that required it to explore, develop, produce, and market gas. He continued that Hilcorp had an obligation to do so if it could make a reasonable profit. He noted that gas prices in Cook Inlet went from the lowest in North America to the highest in North America in the span of the last decade. He asserted that if Hilcorp was put in a position of being impacted in the ability to make a profit, it had the ability to go before the department and ask for royalty relief. He thought the royalties and production tax in Cook Inlet were probably the lowest in the world. He emphasized that Hilcorp should be asked for specific details. Senator Merrick was curious if there were any other entities aside from Hilcorp that would be affected by the S corporation portion of the bill. Senator Wielechowski could not answer Senator Merrick's question because of what he considered "some of the worst financial transparency laws" for oil and gas companies in the world. He mentioned testimony pertaining to the financial transparency laws. He made note of the inability to determine the companies profits. Senator Kiehl referenced removing all impact of corporate income tax from downstream ratepayers, and noted that he had two C-corporations that provided regulated utility service in his district. He thought the idea would be a much bigger statewide change than what was contemplated in the bill. Co-Chair Olson noted that the bill would be back up for consideration later in the week, and there would be an amendment deadline for Thursday at 6 oclock. SB 122 was HEARD and HELD in committee for further consideration.