HB 398-CORP TAX: PUBLIC UTILITY INCOME ALLOCATION  3:34:20 PM CHAIR MEYER announced the consideration of House Bill 398 (HB 398). 3:34:52 PM BRODIE ANDERSON, Staff, Representative Foster, Alaska State Legislature, Juneau, Alaska, provided an overview of HB 398 as follows: House Bill 398 addresses foregone revenue and provides the state with the ability to capture new revenue in Alaska corporate income tax through the elimination of the public utility exemption for water's-edge reporting. A brief history on how we got this piece of legislation introduced. Back in 2004, legislation was passed that required both the Department of Revenue and Legislative Finance to create a report on indirect expenditures and the amount of foregone revenue not captured by the state. The first indirect expenditure report was submitted in 2015, in that report it identified a list of indirect expenditures within the Department of Revenue that should be terminated; then last year in the FY18 budget process, House Finance Subcommittee for the Department of Revenue reviewed these indirect expenditures and recommended that the House Finance Committee offer legislation that eliminates these indirect expenditures. House Bill 398 repeals a specific exemption from the recommendations offered in both of those reports. The indirect expenditure repealed in House Bill 398 is the public utility exemption and it was selected for the following reason: It did not meet the legislation intent and it was felt that it provided a loophole by allowing multi-state corporations operating a public utility in Alaska to choose their apportionment method that is complementary to providing the lowest tax liability possible for the corporation. Typically, multi-state corporations use three-factor formula for apportionment, this formula uses three fractions represented by ratios of the company's property, payroll and sales within the taxing state, this one being Alaska, to their total property payroll and sales within the United States or water's edge. The three ratios are multiplied together to produce a percentage of the company's total taxable income to be allocated to the taxing state, Alaska; this only applies to all non-oil-and-gas corporations, for oil- and-gas corporations we use a formula based on their Alaskan profits and their worldwide profits. The Department of Revenue cannot indicate the amount of potential new revenue captured because the small amount of taxpayers utilizing the exemption, they are required to keep that tax information confidential due to the size of the tax pool, they have indicated though that there will be new revenue if this passes according to their fiscal note provided to members in their packet. 3:37:51 PM CHAIR MEYER asked Mr. Anderson to review the sectional analysis for HB 398. MR. ANDERSON reviewed the sectional analysis as follows: Section 1  Adds a new section, AS 43.20.146, which removes the exemption of the multistate public utilities from water's-edge reporting from within the Multistate Tax Compact. Section 2 & Section 3  Are uncodified law dealing with the applicability of the effective date and transition language for the regulations that would be drafted not to be in effect until January 1, 2019. Section 4  The effective date which applies to Section 1 and Section 2 of the bill is January 1, 2019. 3:39:03 PM At ease. [CHAIR MEYER set HB 398 aside until later in the meeting.] HB 398-CORP TAX: PUBLIC UTILITY INCOME ALLOCATION  4:14:13 PM CHAIR MEYER called the committee back to order. He announced the committee's continuation of the hearing on HB 398. SENATOR WILSON asked if there is opposition to the bill. MR. ANDERSON replied that the bill has not received opposition. He confirmed from previous hearings in the House Finance Committee that the bill will not affect the state's nonprofit- public utilities, strictly multi-state corporations that have a public utility within Alaska's boundaries. He detailed that approximately one to five corporations might be impacted. CHAIR MEYER asked if the corporations that will be adversely impacted know that HB 398 was working through the process. MR. ANDERSON replied that he has contacted specific lobbyists that have contracts within some of the multi-state corporations to figure out whether they would be impacted and what type of opposition might come against HB 398. He disclosed that he has not received opposition notification from the corporations. 4:17:46 PM BRANDON SPANOS, Deputy Director, Tax Division, Alaska Department of Revenue, Anchorage, Alaska, confirmed that he has spoken with specific taxpayers on the legislation's impact. He assumed that those impacted the most know about HB 398. CHAIR MEYER said he was concerned that the corporations currently receiving the tax exemption will pass the added cost from the legislation on to Alaskan. He asked if the Regulator Commission of Alaska (RCA) has oversite. MR. SPANOS explained that the RCA does not regulate all utilities. He pointed out that telecommunications used to be regulated, but currently falls under that utility definition. CHAIR MEYER remarked that he questioned Mr. Sponos' response. He said he believed that the RCA does have regulatory oversite and noted that he had dealt with a bill that addressed the topic. MR. SPANOS admitted that he was not an expert in the regulation field. 4:20:04 PM CHAIR MEYER pointed out that HB 398 has a zero fiscal note. He asked if the hope is the state will get some money back. MR. ANDERSON answered yes. He explained that the fiscal note reflects an increase of some sort due to the potential change in tax liability for corporations utilizing the exemption. CHAIR MEYER noted that Mr. Anderson mentioned that the normal process is a three-step process and the affected corporations do not have to meet the three-step process. MR. ANDERSON answered correct. He detailed as follows: Back when we first wrote the Alaska Corporate Tax Code, banking organizations, financial organizations and public utilities, multi-state corporations, were exempt. In the '80s, Alaska removed financial organizations but at that point no public utility was utilizing this exemption so when the Department of Revenue removed the exemption, it did not come under the radar that public utilities had an exemption. So, we fast forward until I believe the document from the Department of Revenue said about 10 to 15 years ago, public utilities or at least a couple started to utilize the exemption and that's why they felt that they needed a statutory change rather than a regulatory change to get rid of this exemption and that's with water's-edge reporting for calculating all other multi-state corporations use water's-edge reporting where you compare, you create the formula for your Alaska sales, payroll and property against your U.S. or water's-edge sales, payroll and property, and then out of that the percentage is calculated for you Alaska tax liability; that formula, that percentage is exempt for public utilities that are multi-state corporations because of the exemption and as long as it is in line with what Department of Revenue agrees with, they can calculate their own apportionment. 4:22:22 PM CHAIR MEYER opened and closed public testimony. 4:22:48 PM SENATOR GIESSEL moved to report HB 398, version 30-LS1231\D from committee with individual recommendations and attached zero fiscal note. 4:23:01 PM CHAIR MEYER announced that being no objection, the motion carried.