SB 178-PASSENGER VEHICLE RENTAL TAX  2:27:36 PM CHAIR EGAN announced SB 178 to be up for consideration. 2:27:49 PM BRITTANY HUTCHISON, staff to Senator Click Bishop, Alaska State Legislature, Juneau, Alaska, sponsor of SB 178, presented SB 178. She explained that the passenger vehicle rental tax was passed in 2003 and was intended to raise revenue from tourists using rental cars on the state's road systems. The tax wasn't supposed to affect Alaskans in most cases, but that is not the case. Back in 2004 the bill was amended to exempt taxi cabs from the tax, and it was stated then that it was not the intent of the original bill to negatively impact small businesses, but it does. She explained that in 2013, the Department of Revenue (DOR) began an attempt to collect the rental vehicle tax from Alaskan businesses that may not even be involved in the tourist industry or rent to tourists. And instead of announcing their new position and applying it prospectively, the department applied the tax retroactively back to 2004. Though it required businesses to pay a 10 percent rental vehicle tax on all leases for the past nine years, those taxes had not been collected from the clients and that could possibly bankrupt some small Alaskan businesses. A list of those businesses was in their packets. MS. HUTCHISON said that SB 178 amends the rental vehicle tax to make it clear that the tax should not apply to Alaskan businesses that are making long term rentals to other Alaskan businesses. Specifically, section 1 reduces the lease term exemption from 90 to 30 days and section 2 reduces the gross vehicle weight from 8,500 to 6,500 lbs. The second part of section 2 clarifies that this exemption applies to the transportation of any goods whether commercial or personal. Section 4 makes these changes retroactive to 2004. She said these changes reflect the original intent of the legislature that the vehicle rental tax applies to short term rentals to tourists and not to Alaskan businesses renting to other Alaskan businesses. This bill is needed because the DOR is trying to collect nine years of back taxes, interest, and penalties from Alaskan businesses that were never intended to be taxed in the first place. 2:31:02 PM SENATOR DYSON said he was startled that the tax is retroactive for such a long time and was surprised they could pass a law that incurs such a liability for companies. SENATOR FRENCH said he thought there was a misunderstanding, but he knew what had happened: they passed a law in 2003 that began taxing rental cars. It's been in place ever since that time and now some companies have found themselves in a tax dispute with the DOR. This would pass an exemption that would reach back that far because of the misunderstanding and dispute. He sponsored an exemption due to the same kind of thing addressed on page 2, lines 18-19, (h) where the tax was falling on a small seasonal group of people and more was being spent on collection than was actually being collected. 2:33:18 PM SENATOR FAIRCLOUGH said the fiscal note was quite interesting, because it went forward in time, and she wondered what it would look like in reverse. Would it take 10 people to implement this bill? 2:34:01 PM MATT FONDER, Director, Tax Division, Department of Revenue (DOR), said the reason for the high number of employees was that the department would have to try to go back and identify and refund taxes to people who rented cars that may fall within one of the exemptions during the last 10 years. SENATOR FAIRCLOUGH said she was concerned that the 90 day exemption and trying to find people who rented was creating this pay back issue. People come to Alaska and rent motor homes and the state has been trying to collect from those people who were causing deterioration on its highways. The intent was to leave commercial vehicle rentals out. MS. HUTCHISON said the intent behind changing 90 days to 30 was because most tourists don't rent for over 30 days and anyone over that would be an Alaskan businesses and, therefore, be exempt. SENATOR FAIRCLOUGH asked what part of the bill was causing the big fiscal note, an estimated $1,293,000, in 2015. MR. FONDER answered that was actually for staff to set up the refund program and identify taxpayers who may have paid the tax that would fall under one of the new exclusions and their refund. The fiscal note also talks about a potential reduction of $800,000 in revenue to the state each year if this bill were to pass. SENATOR FAIRCLOUGH said there should be a better way to do this. She asked if DOR had been collecting $800,000 from commercial rentals that hadn't been challenged until now. 2:38:12 PM JOHANNA BALES, Deputy Director, Tax Division, Department of Revenue (DOR), explained that the fiscal note represents all of the bill's provisions. It would exempt anything over 30 days (right now it's anything over 90 days) from taxable rentals; another provision exempts any vehicle weighing more than 6,500 lbs. used to transport personal or commercial property. To prepare this fiscal note, she looked at records from companies the department had audited to get an estimate of what type of activity they had. She estimated no more than $800,000 each year and applied that going back for 10 years and going forward as lost revenue. They would have to evaluate all the rental contracts from the last 10 years to determine which ones would have been exempt had this language been in effect since 2004 forward. They would work with the about 110 rental car companies that have remitted the taxes to get copies of contracts and send out public notices. Because a lot of renters are from out of state, the department would be required to refund taxes paid if their rental car contracts meet the new exemption criteria. 2:40:20 PM SENATOR FAIRCLOUGH said she had a hard time with hiring 10 employees to go back through records to 2004 and she also found it challenging that they have what appears to be a new interpretation at the department. When did the challenges start coming to DOR? MS. BALES answered it would be up to the sponsor to decide how to handle this, but this is not a new interpretation of statutes that have been on the books since 2004. It had just come to their attention that some companies were conducting vehicle rentals that met the criteria to collect and remit tax that, because the department looks for companies that say "vehicle rental company" on their business licenses, weren't picked up. Companies that do heavy equipment leasing aren't recognized as having vehicle rentals that met this criterion. She said the department conducts compliance projects to see if any taxpayers need to be educated and need to come back into compliance. As far as the fiscal note, she explained that those positions would be needed for the retroactivity provision of the bill to make sure that all the consumers who paid the tax to the rental car companies would be refunded, which is what this bill would require. However, without the retroactivity provision they would have a zero fiscal note in terms of needing new people. 2:43:07 PM SENATOR FAIRCLOUGH said she looked forward to working with the sponsor to solve this problem. She remembered she had voted in favor of this bill, and her understanding was that it was for folks coming in at the Anchorage International Airport or otherwise and renting a motor home from someone or a vehicle to explore Alaska. It was never the intent of the legislature to pick up commercial rentals or long term leases for equipment that's moving to and from and being used by Alaskans. CHAIR EGAN agreed, but added that the problem is that there are at least 14 businesses that are by affected by this tax provision but none of them is a car rental agency. SENATOR BISHOP said the intent of the bill is to get back to the original intent of 2004, which is taxing rental cars and summer tourism and not taxing Alaskan businesses doing mining and oil patch work and operating on unimproved roads with no state support or maintenance. 2:45:41 PM RYAN PETERKIN, President, Maytech Alaska, Kenai, Alaska, supported SB 178. He is a fourth generation Alaskan and his business is in Kenai and Prudhoe Bay. They rent industrial equipment, but to satisfy their clientele, pickup trucks became a byproduct of their business. They employ 75 Alaskans with an average salary of $70,000 per year totaling about $6 million. He first learned about the tax on November 6 when he got a call from his Prudhoe Bay operation saying that a criminal investigator and an armed enforcement officer had arrived and said they were in violation and that there would be criminal charges if they didn't comply and to contact Jonathan Page in the Anchorage office. They got in touch with him the next day and explained their line of business. MR. PETERKIN said they talked and came to an understanding that personal property meant their safety gear, laptop computers, et cetera. He said they fully intend to comply, but with a 90-day period and if a client extends a 6-month contract for another 6 months, that 6 last months is taxable. Most of their contracts are worked off master service agreements, and oil companies have multiple year contracts. All of their pickup truck rentals and leases are in commercial applications, 90 percent of which are in Prudhoe Bay; the other 10 percent are in the Kenai Peninsula, and 5 percent of those are on the west side of Cook Inlet on dirt roads and gravel. He said the 6,500 GVW would be beneficial, because oil companies went to half ton crew cab pickup trucks that are more cost effective and have less impact to the road. 2:49:13 PM Paying the back tax on the pickup trucks would be devastating to his business, if it didn't put them out of business, Mr. Peterkin said. They would have to seek financial aid, for sure. Theirs is a growing business that is trying to respond to clientele, and they just don't have those kinds of reserves. They didn't collect the tax nor did they ever get a notice or any other means of communication except when they were blindsided by a criminal investigator and an enforcement officer that showed up in their Prudhoe Bay facility. CHAIR EGAN asked if his vehicles were getting larger. MR. PETERKIN said all their vehicles are half ton to three- quarter ton pickups - some are one ton - all are rented to oil and gas companies with commercial applications; none to a private individual. SENATOR EGAN asked if the gross vehicle weight had changed. MR. PETERKIN answered their GVW probably ranges from 7,000 lbs. to 12,000 lbs. 2:51:05 PM JON COOK, CFO, Airport Equipment Rentals, Inc., Fairbanks, Alaska, supported SB 178. He said his company is a family owned business employing 125 people with locations in Dead Horse, Fairbanks, Delta, Anchorage, and Kenai. They are the John Deere construction equipment dealer for Alaska and the largest equipment rental company in Alaska representing a variety of manufacturers. As a customer service they offer rentals to their construction equipment customers who are primarily producers and Alaska contractors on the North Slope. Most of the rentals are for several months and often years in duration. Out of 5,000 rental units 150 are trucks; the rest is heavy equipment and other pieces of non-mobile equipment. He has familiarity with this tax and its entire legislative history. His company owned the National Car Rental concession at the Fairbanks Airport through May 2013, and many know him as a reformed car dealer (back to 1994). He said the original intent of the tax was meant to tax tourists to help fund road maintenance and tourism marketing. Some of the concerns he has regarding DOR and its retroactive reinterpretation of the statute is that it is contrary to the legislative intent, specifically with regards to long term rentals of pickup trucks between Alaska businesses and primarily on the North Slope. MR. COOK said their company has and continues to pay the rental tax, because as a national car rental dealership, they had been aware of it. He learned about the department retroactively collecting the tax from his competitors. While he has the utmost respect for Ms. Bales and the department - they are just trying to do their job and protect the best interests of the state - some of their interpretations of the statute are very concerning. If this legislation is not passed and the tax is retroactively collected, several companies will have to declare bankruptcy. He said the truck rental business is a low margin business that they are not interested in, so he wanted to keep these competitors around. 2:55:11 PM He wanted to discuss the 90 day exemption as well as the exemption for 8,500 GWV that transport personal property that does not have a definition. Specifically with regard to North Slope rentals, AS 43.52.099(2) defines a passenger vehicle as a motor vehicle that is driven on a highway or public right-of- way, and the North Slope road system is neither; it is a private road system. He was also unclear about why 10 people were needed to refund the tax. He didn't have records that go back 10 years, and he wasn't interested in spending the state's time to try to refund taxes to customers. 2:56:37 PM CHAIR EGAN said he was welcome to come back and testify again and mentioned receiving many letters supporting some form of SB 178. 2:57:07 PM SENATOR DYSON asked Senator Bishop if the department was still going after these enforcement actions or should the committee take some action telling them to stop until the issue is resolved. SENATOR BISHOP said he didn't know. CHAIR EGAN held SB 1`78 in committee.