HB 341 TAX APPEALS/ASSESSMENT/LEVY/COLLECTION  CHAIRMAN TAYLOR announced that although HB 341 is scheduled on today's calendar, it is not his intent to move the bill out of committee at this time. The committee will take up amendments later in the meeting, and a committee substitute will be drafted for consideration on April 19. HB 341 TAX APPEALS/ASSESSMENT/LEVY/COLLECTION  REPRESENTATIVE JOE GREEN, sponsor of the measure, informed committee members he and department officials met over the weekend and prepared a proposed amendment to resolve one of the three issues of contention. Headway was made on the other two issues, but no resolution was reached. He planned to offer amendments on the other two issues as well. REPRESENTATIVE GREEN explained proposed amendment #1 separates the appeal from the taxing authority by establishing an administrative law judge through a nomination procedure. The Alaska Judicial Council would nominate at least two names for the chief administrative law judge for the governor to choose from. Subsequent administrative law judges would be chosen in the same manner. The last two to three pages of the amendment are technical to change from the board concept to the administrative law judge concept. Although he and other legislators prefer to maintain control through legislative approval of the nominees, in the interest of cooperation he agreed to this method as it accomplishes the purpose of keeping the appeal body away from the taxing authority. REPRESENTATIVE GREEN discussed amendment #2 which deals with the judicial bypass issue. The department does not concur with this amendment. Amendment #2 allows the taxpayer to go from the informal review straight to Superior Court if the taxpayer prepays the total amount due. Failure to deposit those funds would dismiss the taxpayer's appeal. Interest that accrues on the deposited funds would be added to the principal and awarded to the winning party. If the judicial decision determines a fractional settlement, both parties would receive an award proportional to the decision. Using that method, the taxpayer would receive the same amount of interest he/she would have had the prepayment not been required. Number 437 SENATOR GREEN asked for an example of an amount of a prepayment. REPRESENTATIVE GREEN responded it could be millions of dollars, and possibly as high as hundreds of millions. He pointed out this procedure does not only apply to oil companies but to all taxpayers. REPRESENTATIVE GREEN clarified that the amendments labeled "Z.5, Z.6 and Z.7" are amendments 1, 2, and 3. Amendment #3 addresses the transition issue and gives any taxpayer who filed an appeal, before the act takes effect, 45 days to either prepay the disputed tax amount and go to court, or have a formal appeal within the department. A party currently undergoing a formal appeal would still have the right to go to trial, but not have a de novo trial. Section 18 was added to the bill at the recommendation of the Division of Legal Services and does not change the intent of the transition provision. Number 387 CHAIRMAN TAYLOR returned. BOB BRIGGS, Assistant Attorney General, stated the Department of Law supports amendment #1. With regard to amendment #2, he believed it would be unwise for the committee to contemplate a payment provision that allows a taxpayer to essentially save money by filing an appeal. If the interest rate for monies deposited in the registry of the court is lower than the interest rate provided under AS 43.05.225, it would be to the taxpayer's advantage to file an appeal. CHAIRMAN TAYLOR asked why that would occur. MR. BRIGGS answered the amendment does not specify what interest rate the money deposited in the registry of the court will earn. Assuming that interest rate is lower than the interest rate accruing to a taxpayer under AS 43.05.225 the taxpayer could simply file an appeal and save money. SENATOR MILLER asked if the taxpayer has to prepay the tax on appeal at present. MR. BRIGGS answered no. SENATOR MILLER noted amendment #2 would require the taxpayer to pay the tax upfront to the court. He questioned how that would benefit the taxpayer since that money could not be used for other purposes. MR. BRIGGS explained under the current system, if a taxpayer does not pay a delinquency, the interest accrues on that delinquency under a rate defined by statute, which is a minimum of 11 percent. Under amendment #2 there is no interest rate specified therefore it is possible for a taxpayer to gain a benefit from depositing the money in the registry of the court and pursuing an appeal. Number 357 SENATOR MILLER discussed the opposite scenario in which the taxpayer goes to court and has lost the ability to invest the money deposited with the court registry. If that taxpayer appeals through the administrative law judge, no money has to be prepaid, therefore the taxpayer is free to invest it in a project that may be earning 20 percent. MR. BRIGGS noted he is not speaking against the concept of prepayment, which is a policy matter the Department of Revenue should address, but he expressed concern that amendment #2 could encourage frivolous appeals. CHAIRMAN TAYLOR commented the current version of the bill allows the taxpayer to continue to play in the administrative process, or opt out and go to Superior Court. He asked Mr. Briggs if the taxpayer should be allowed to opt out for free. MR. BRIGGS repeated he was not speaking against the concept of prepayment, just the method used in amendment #2, however the Department of Law is opposed to the concept of a separate direct appeal track to Superior Court. MR. BRIGGS addressed amendment #3 regarding the transitional provision. There are 31 cases at the formal appeal stage. The total amount of money at stake in those cases is $1.224 billion. Those cases are in various stages of the formal hearing process; in some a notice of appeal has been filed; in some there has been motion practice and discovery; in other cases there has been a formal hearing and the taxpayers are awaiting decisions. A few cases will go to a formal hearing process within the next month. The state has invested resources in those cases, attorney time and other resources: those resources would be wasted if the taxpayers were allowed to bypass the formal hearing and go to court. He preferred the approach in HB 427 which provides that existing rules apply to pending cases at the formal appeal stage, unless the taxpayer and Departments of Revenue and Law reach an agreement as to how the new procedures should apply to those cases. CHAIRMAN TAYLOR asked Mr. Briggs if he knew of any cases worth $50 or $60 million that the state has taken to judgment and settled, and if so whether the state received interest. MR. BRIGGS replied he was unsure, but thought only one case has gone to a formal hearing. In that case the taxpayer and Departments of Revenue and Law resolved the situation. CHAIRMAN TAYLOR clarified his concern is that if cases are settled within the Department of Revenue no one will know how much the state lost in interest and penalties since those are usually the first things given up as the parties work towards a settlement. MR. BRIGGS felt the idea of prepayment is a good one if the direct to court option is allowed. CHAIRMAN TAYLOR stated he wants to place a hurdle to the taxpayer from getting a free ticket to the court system but believes having to prepay the full amount to be a penalty. MR. BRIGGS believed the state would be getting the benefit of a tax delinquency based on the presumption the tax assessment is valid. There will be a lot of delay if taxpayers are allowed to take a tax case directly to a Superior Court judge because the judge will not have the benefit of the administrative record. As a practical matter, that will slow the case down and take longer to resolve than if the case is first heard by an administrative tribunal and then appealed on the record to a Superior Court judge. SENATOR MILLER asked what the delinquency rates are charged by the Department of Revenue. MR. BRIGGS answered those rates are set by AS 43.05.225, and have an 11 percent floor. SENATOR MILLER said that statute is referred to in (B). MR. BRIGGS deferred to Ms. Vogt to answer that question. DEBORAH VOGT, Deputy Commissioner of the Department of Revenue, discussed the proposed amendments. She reiterated the parties have agreed that amendment #1 is the preferred alternative to the existing provisions regarding method of appointment. Regarding amendment #2, she believed a prepayment requirement is a great improvement. In her interpretation of paragraph (B), interest under AS 43.05.225 is tolled, and the interest that accrues on the escrow account substitutes for that interest. The interest rate under AS 43.05.225 is five percent above the federal rate with an 11 percent floor. That rate applies to any amount refunded by the state resulting from an overpayment, as well as to any amount owed by the taxpayer. Amendment #2 does not set out investment standards and she presumed the court system would use a conservative strategy for a liquid account. In response to an earlier comment made by Chairman Taylor, she noted the Department of Revenue is prohibited from forgiving interest in settlements. Issues are negotiated, the parties agree to an amount each issue is worth, and the statutory interest is applied to that amount. She repeated that a prepayment provision is an improvement but the state might get substantially less using an escrow account rather than the statutory interest rate. Regarding amendment #3, MS. VOGT shared Mr. Briggs' concerns. The cases currently before the hearing officer include fisheries business tax, mining license tax, corporate income tax, a few oil and gas cases, but most of those cases do not involve any of the parties that have negotiated this legislation. They are primarily small taxpayers owing small amounts. There are a couple of big cases which amount to over $1 billion. Amendment #3 would permit a person who has gone through a hearing and lost, to have a hearing before the new hearing officer, or to go to court. The department prefers the language that makes the cutoff date the effective date of the act; appeals after that use the new system, existing cases stay within the department unless both parties agree to use the new system. At this time there is only one taxpayer concerned about the transition provision. Number 164 CHAIRMAN TAYLOR stated the $1 billion currently in dispute has taken years to accumulate. This bill will only have prospective effect and then only to those taxpayers who have high enough amounts in dispute they want to go to court. MS. VOGT could not speak to particular cases because of confidentiality requirements, but noted the retroactive provision is not of concern to the biggest taxpayer. She repeated there is one problem, and the department is trying to resolve the situation without drafting a provision which allows taxpayers to take a second or third bite. CHAIRMAN TAYLOR asked if there was objection to amendment #1. There being no objection, the amendment was adopted. CHAIRMAN TAYLOR asked if there was objection to the adoption of amendment #2. SENATOR ADAMS objected. The motion carried with Senators Green, Miller, and Taylor voting "yea," and Senator Adams voting "nay." CHAIRMAN TAYLOR asked if there was objection to the adoption of amendment #3. SENATOR ADAMS objected. Amendment #3 was adopted with Senators Miller, Green and Taylor voting "yea," and Senator Adams voting "nay." CHAIRMAN TAYLOR announced that he planned to hold the bill until Friday to give the sponsor and Department of Revenue more time to work on the disputed issues. SENATOR ADAMS asked Ms. Vogt if the Governor will veto HB 341 with amendments #2 and #3. MS. VOGT replied it is her understanding the Governor will veto a bill that allows the taxpayer to avoid the new administrative process and go straight to court.