HOUSE LABOR AND COMMERCE STANDING COMMITTEE February 4, 1998 3:28 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative John Cowdery, Vice Chairman Representative Bill Hudson Representative Jerry Sanders Representative Joe Ryan Representative Tom Brice Representative Gene Kubina MEMBERS ABSENT All members present COMMITTEE CALENDAR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 142 "An Act relating to the sale or transfer of new or used motor vehicles; relating to the confidentiality of certain information related to attorney general investigations of unlawful trade practices and antitrust activities; establishing additional unlawful trade practices; relating to the exemptions from telephonic solicitation regulation; regulating the sale of business opportunities; amending Rules 4 and 73, Alaska Rules of Civil Procedure; and providing for an effective date." - HEARD AND HELD * HOUSE BILL NO. 187 "An Act relating to a small business development tax credit under the Alaska Net Income Tax Act; and providing for an effective date." - MOVED CSHB 187(L&C) OUT OF COMMITTEE (* First public hearing) PREVIOUS ACTION BILL: HB 142 SHORT TITLE: BUSINESS PRACTICE REGULATIONS SPONSOR(S): REPRESENTATIVES(S) DAVIS, Croft Jrn-Date Jrn-Page Action 02/17/97 374 (H) READ THE FIRST TIME - REFERRAL(S) 02/17/97 374 (H) L&C, JUDICIARY 02/19/97 408 (H) COSPONSOR(S): CROFT 04/08/97 1025 (H) SPONSOR SUBSTITUTE INTRODUCED - REFERRALS 04/08/97 1025 (H) LABOR & COMMERCE, JUDICIARY 05/02/97 (H) L&C AT 3:15 PM CAPITOL 17 05/02/97 (H) MINUTE(L&C) 05/05/97 (H) L&C AT 3:15 PM CAPITOL 17 05/05/97 (H) MINUTE(L&C) 10/15/97 (H) L&C AT 1:00 PM ANCHORAGE LIO 10/15/97 (H) MINUTE(L&C) 10/20/97 (H) L&C AT 1:00 PM ANCHORAGE LIO 10/20/97 (H) MINUTE(L&C) 02/04/98 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 187 SHORT TITLE: SMALL BUSINESS DEVELOPMENT TAX CREDIT SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR Jrn-Date Jrn-Page Action 03/12/97 638 (H) READ THE FIRST TIME - REFERRAL(S) 03/12/97 638 (H) L&C, STATE AFFAIRS, FINANCE 03/12/97 638 (H) FISCAL NOTE (REV) 03/12/97 639 (H) GOVERNOR'S TRANSMITTAL LETTER 02/04/98 (H) L&C AT 3:15 PM CAPITOL 17 WITNESS REGISTER REPRESENTATIVE GARY DAVIS Alaska State Legislature Capitol Building, Room 513 Juneau, Alaska 99801 Telephone: (907) 465-2693 POSITION STATEMENT: Presented sponsor statement for SSHB 142. MICHAEL STEPP, President Alaska Finance and Insurance Company, Incorporated d.b.a. Stepp Brothers Lincoln Mercury BMW and Land Rover Anchorage; President, Alaska Auto Dealers Association 730 East 5th Avenue Anchorage, Alaska 99501 Telephone: (907) 257-6600 POSITION STATEMENT: Testified against SSHB 142 on behalf of the Alaska Auto Dealers Association; proposed amendment to Section 1. DAVEED SCHWARTZ, Assistant Attorney General Commercial Section, Civil Division Department of Law 1031 West 4th Avenue, Suite 200 Anchorage, Alaska 99501-1994 Telephone: (907) 269-5265 POSITION STATEMENT: Testified on SSHB 142. JEFF BUSH, Deputy Commissioner Department of Commerce and Economic Development P.O. Box 110800 Juneau, Alaska 99811-0800 Telephone: (907) 465-2500 POSITION STATEMENT: Testified in favor of HB 187. BOB BARTHOLOMEW, Deputy Director Income and Excise Audit Division Department of Revenue P.O. Box 110420 Juneau, Alaska 99811-0420 Telephone: (907) 465-2320 POSITION STATEMENT: Provided information on HB 187. ACTION NARRATIVE TAPE 98-9, SIDE A Number 0001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee meeting to order at 3:28 p.m. Members present at the call to order were Representatives Rokeberg, Cowdery, Sanders and Kubina. Representatives Ryan and Hudson arrived at approximately 3:32 p.m. and 3:37 p.m. respectively, and Representative Brice arrived at 3:45 p.m. SSHB 142 - BUSINESS PRACTICE REGULATIONS Number 0085 CHAIRMAN ROKEBERG announced the committee would address SSHB 142, "An Act relating to the sale or transfer of new or used motor vehicles; relating to the confidentiality of certain information related to attorney general investigations of unlawful trade practices and antitrust activities; establishing additional unlawful trade practices; relating to the exemptions from telephonic solicitation regulation; regulating the sale of business opportunities; amending Rules 4 and 73, Alaska Rules of Civil Procedure; and providing for an effective date." He noted the bill's last public hearing had been held during the interim. Number 0115 REPRESENTATIVE GARY DAVIS presented the sponsor statement for SSHB 142. He stated there had been a great deal of discussion on Section 2 at a hearing last year. Section 2, he said, deals with additional automobile dealer requirements certifying the condition of a vehicle, including information regarding whether a vehicle had been wrecked, and had any mechanical or body damage. Representative Davis mentioned the interim meeting, stating there had been discussion on the same issue. He said there did not appear to have been satisfactory negotiations between the automobile dealers and the Department of Law (DOL). Representative Davis stated he feels the other inclusions in SSHB 142 are valuable and does not want to jeopardize them, so he is offering an amendment to the committee deleting Section 2 and all related provisions. Number 0255 REPRESENTATIVE DAVIS noted there is also concern from the Alaska Auto Dealers Association and individual automobile dealers about Section 1, which, he said, clarifies a loophole in legislation relating to the emissions (I/M) certification automobiles in Fairbanks and Anchorage need to have before a sale can take place. Representative Davis stated, "It [SSHB 142] would require that a used car dealer provide the prospective buyer with a copy of an auto emissions certificate of inspection or noncompliance before a sales contract is signed. Current law requires only that a used vehicle have a certificate of compliance or noncompliance before the dealer can transfer title to the buyer, yet sales contracts are commonly signed days before title transfer." Representative Davis said the buyer might not be aware of the outcome of a vehicle's I/M test before making a purchase commitment. Representative Davis stated this would require the automobile dealers to process another piece of paper, a not completely baseless argument, but he feels it is a valuable section and should be left in the bill. Number 0444 REPRESENTATIVE DAVIS stated another section of SSHB 142 clarifies that the state's consumer protection and anti-trust investigative files are not available for inspection under the Alaska Public Records Act. He said the extent to which the state's investigative records are shielded from public scrutiny was called into question by a recent Alaska Superior Court case, and he noted important confidentiality issues remain unresolved. Representative Davis stated Assistant Attorney General Daveed Schwartz would be testifying via teleconference on this issue. Number 0498 REPRESENTATIVE DAVIS added SSHB 142 also clarifies the existing mail-order catalog exemption in the Alaska telemarketing law. He commented most telemarketers are required to register with the state under current law so they can be located if they defraud consumers. He stated there is an overlooked "technicality" in the telemarketing legislation brought up through complaints to the DOL. As his final point, Representative Davis stated SSHB 142 creates a statute regulating the sale of business opportunities. He noted high pressure salespeople often take advantage of Alaskans' entrepreneurial spirit by resorting to fraudulent, deceptive and unfair sales practices. He stated he would defer to the DOL to explain the details of that provision. Representative Davis said he felt the key objections to SSHB 142 were addressed through the deletion of Section 2, although he expected the committee to hear concerns about Section 1. Number 0629 REPRESENTATIVE JOHN COWDERY mentioned lienholders, noting the situation of receiving title and discovering problems at that later date. He asked Representative Davis the best way a same-day transaction with an out-of-state or nonlocal lienholder could be facilitated. Number 0667 REPRESENTATIVE DAVIS stated he believed, with a same-day transaction, the only way would be to have the vehicle I/M tested that day. Number 0700 REPRESENTATIVE COWDERY mentioned a vehicle with current I/M certification near expiration. REPRESENTATIVE DAVIS responded the question had previously come up and he thought it might be debated during teleconference testimony. Number 0727 CHAIRMAN ROKEBERG briefly discussed meeting agenda and noted one of the two witnesses standing by on teleconference, Assistant Attorney General Daveed Schwartz, had not had an opportunity to testify on the full bill at the previous Anchorage hearing. Number 0839 MICHAEL STEPP, President, Alaska Finance and Insurance Company, Incorporated, d.b.a. Stepp Brothers Lincoln Mercury BMW and Land Rover Anchorage; President, Alaska Auto Dealers Association, testified via teleconference from Anchorage on behalf the Alaska Auto Dealers Association. He referred to the October 1997 legislative hearing and stated, "Our main concern, with respect to Section 1 of HB 142, is first of all the fact that it -- as one of the communities in Anchorage that (indisc.) business deals with ..." Mr. Stepp diverged from his point to inform the committee the I/M issue only affects the Anchorage and Fairbanks members of the Alaska Auto Dealers Association. He then continued, "Fairbanks and ourself, then, are the ones that are required to perform these inspections, and with that being said, there's certain difficulties that come into play in the normal course of doing business and - and I don't know of anyone in your capacity who's certainly trying to serve the public interest that would want to impede (indisc.) commerce from taking place." Number 0913 MR. STEPP described a scenario in which an individual trades in a vehicle at Mr. Stepp's place of business on Friday night, noting the business does not operate a mechanical shop after-hours on Friday evening, Saturday or Sunday. Subsequently another prospective buyer comes in later Friday evening and attempts to buy that vehicle. However, under the current structure of HB 142, Mr. Stepp said, his dealership would be preempted from either showing or selling that vehicle "without having the client being given, or obtaining a disclosure that essentially says, 'Yes, we will provide you with a valid I/M compliance or noncompliance.'" Mr. Stepp continued, "We aren't in the position to make that representation because we have not had the opportunity -- we certainly don't want to put ourself in a position where we are acting in - in conflict with the law, so therefore we're faced with a dilemma: Do we lose the potential sale? Do we have the buyer who may have been waiting for that specific deal not be able have the opportunity to enter into the transaction? Or do we go ahead and know that we run the risk, then, of not complying, which certainly doesn't appear to me to be a valid set of circumstances?" Number 0994 MR. STEPP commented he had spoken earlier with Mr. Schwartz about the "addendum" to Section 1 proposed by the Alaska Auto Dealers Association which reads: "Page 2, line 12, add the following 'OR (3) obtain from the prospective buyer, transferee, assignee, or agent of the prospective buyer, transferee, or assignee, a signed, written statement that the prospective buyer, transferee, or assignee, or the agent of prospective buyer, transferee, or assignee waives the requirements of (1) and (2) of this subsection.'" Mr. Stepp said Mr. Schwartz indicated this proposed amendment would be in direct conflict with the existing consumer protection Act. Number 1028 MR. STEPP continued, "That being said, I feel as though our position relative to the Alaska automobile dealer association [Alaska Auto Dealers Association] is that, we believe there's already sufficient legislation in place, or at least a law within the two municipalities, that being Fairbanks as well as Anchorage, that requires, if we have to I/M a vehicle in order to transfer title, or we have to give a consumer a noncompliance document. Having to do so prior to entering into the contract appears, to me, to be an additional burden that is undue. And I would state this for the record, that ... probably in 90 plus percentage of the cases, our vehicles are already setting on the lot, as are most dealers, with the I/M inspection already performed. We'd only be talking about those isolated instances where you could not have the opportunity in most cases to have it checked prior to the client looking at it." Mr. Stepp noted HB 142, in his opinion, appeared to be a piece of legislation that probably would not affect many transactions. He said, "The benefit that would be derived versus the exposure to the selling dealer seems to me to not be a situation where there's going to be a lot of appreciable gain." Number 1114 MR. STEPP stated he did not think maintaining and trying to more closely monitor the dealer body with respect to I/M certification would have a positive effect on Anchorage's or Fairbanks' air quality, indicating he felt this was the purpose of the I/M requirements. Mr. Stepp noted testimony on behalf of the Alaska Auto Dealers Association in October 1997 which, he said, clearly pointed out, according to R. L. Polk and Company, Incorporated, statistics, the dealer body probably accounts for less than 50 percent of vehicle transactions in the state. MR. STEPP said, "The real goal, here again, is to try and get vehicles that are operating cleaner and having more compliance, rather than trying to police the dealer body and make sure that they, in fact, have not circumvented a particular law or requirement. And I'm the first to tell you that it - it is our desire, in each and every case, to want to be in compliance. If there's some way we can do this without preempting our ability to derive a living by having the vehicles readily available for sale -- and if you know anything at all about our industry, when a consumer comes to us today and wants to buy something, if we tell them, 'Sorry you're unable to look at that today because we haven't had a chance to check it out,' a good many of them will just go on down the street and check with somebody else." MR. STEPP stated he felt Section 1 would be "severely negative in its overall set of circumstance" because of the quantity of vehicles traded in on weekends and the number of I/M certified technicians. He commented, "So I would just submit to you that I don't believe that there's going to be appreciable benefit derived, based on what's currently being complied with, within the two municipalities and - and it doesn't appear to me to be based on information that was either given in prior testimony or, possibly, available yet today, 'cause I have seen nothing to - to substantiate that there are substantial abuses of this industry- wide." Number 1251 REPRESENTATIVE GENE KUBINA asked, when a vehicle was taken in trade, didn't Mr. Stepp's dealership have a mechanic who examined the vehicle and estimated a value, who could be trained to do an I/M test as well. Number 1269 MR. STEPP stated his dealership does not have a technician who looks at vehicles when they are traded in, and many of his dealership's transactions take place when no technicians are around. The sales manager appraises vehicles as part of his duties. Mr. Stepp said, "In all fairness, most of the transactions that are involved for our store - and again I would just say this is probably the case for most within the Municipality of Anchorage and probably within the city limits of Fairbanks as well - are taking in trade vehicles that have previously passed the I/M, or presently have an I/M certificate with them. So, it really is not something that - that we concern ourself with an awful lot on the broad picture, but there are those isolated circumstances where you do get a vehicle that has ... been tampered with, modified, that you have no way of knowing until the particular inspection does take place -- and if, in fact, you can't do that inspection prior to showing the vehicle, you run the risk, under your proposed legislation here , of having significant liability because you've, in fact, reported something to the client that doesn't exist." Number 1334 REPRESENTATIVE KUBINA asked what happens when a consumer buys that vehicle and takes it in for an I/M inspection the vehicle doesn't pass. Does Mr. Stepp's business stand by that vehicle and fix it, or is the person stuck with a vehicle that cannot be certified? Number 1344 MR. STEPP responded his business does not send vehicles to a third party for I/M inspection; his business has personnel certified by the Municipality of Anchorage to perform these inspections. Number 1378 REPRESENTATIVE KUBINA noted he was concerned about instances Mr. Stepp had previously described when a technician was not available. He asked what happened when a person drives a car away on Saturday that was taken in trade on Friday night, and was, therefore, uninspected. MR. STEPP replied the person would bring the vehicle back to Mr. Stepp's business on Monday. REPRESENTATIVE KUBINA asked if Mr. Stepp's business then guaranteed the vehicle would pass inspection since it had been purchased there. Number 1401 MR. STEPP responded his business has never sold a vehicle to a retail owner that either did not already comply or his business did not make comply. He said, "The vehicle would come back to us, we would perform the inspection, and, if in fact, there were upgrades necessary to it - depending on those circumstances, we would have the opportunity with the customer -- and - and what we do, just let me preface this by saying, if you came in and bought a car from us on Friday night ... and we had not inspected it the car, we would tell you we didn't inspect the car and we would reserve the right to allow you to rescind your purchase and not have to buy it, if we couldn't conform it. But that's not what I'm seeing here in the legislation." Number 1455 REPRESENTATIVE DAVIS questioned Mr. Stepp about the Municipality of Anchorage's requirements concerning I/M certification compliance in private sales. Number 1465 MR. STEPP answered it was his understanding before the title could be transferred to the next owner, he or she must have an I/M certificate or certificate of noncompliance. He noted did not handle private transactions and was not familiar with the procedure. Number 1495 CHAIRMAN ROKEBERG referred to a bill (HB 222) passed the previous year, "That was my 'junk car bill' that allowed cars to not have a test the way they were previously, before they could be either -- the title could be transferred without it ...." Number 1508 REPRESENTATIVE DAVIS noted he did not think anything, anywhere, restricted a dealer from showing a vehicle at anytime. Number 1525 MR. STEPP responded prior that day's rewrite of HB 142, there was a restriction relative to showing the vehicle without proof of I/M certification. He said he was told the term, "before entering into a contract," applies to oral contracts "and things of that particular nature," as well as written contracts. "If my understanding of your proposed law is correct, that if we show you a vehicle, you and I enter into a contract on the vehicle this evening. I have not got the vehicle I/M, I cannot furnish you with a valid copy of a certificate of inspection. The only thing I can give you today is a noncompliance one, because I wouldn't know." Number 1594 CHAIRMAN ROKEBERG stated the committee would be in contact with Mr. Stepp. He called Mr. Schwartz to testify on the non-automobile portions of SSHB 142. Number 1661 DAVEED SCHWARTZ, Assistant Attorney General, Commercial Section, Civil Division, Department of Law, testified via teleconference from Anchorage. He noted he had many comments on Section 1, but would defer those comments to another time at the Chairman's request. MR. SCHWARTZ addressed Sections 4, 5 and 6, concerning the confidentiality of the state Unfair Trade Practices and Consumer Protection Act and (indisc.) investigative work. This portion of the bill clarifies that the DOL's records are not available under the Act after the investigative file is closed. Presently, he noted, the confidentiality section in the Unfair Trade Practices and Consumer Protection Act says, "The consumer protection Act records are confidential to the extent that they're not available under the Public Records Act." The DOL's interpretation has always been that the records cannot be accessed under the Public Records Act either during an investigation or after that investigation has been completed. However, in a recent Anchorage Superior Court case involving the seafood processing industry, Mr. Schwartz noted the plaintiffs attempted to obtain the state's closed investigative file to support their suit. Both the industry and the state objected. He said the state's feeling was that although the court could order the release of records under the anti-trust Act and subject them to a protective order making them unavailable to the public, the records were not available under the Public Records Act. He stated the DOL feels it would receive less cooperation from witnesses reporting violations and from companies submitting records in response to subpoenas during investigations if the investigation records could be accessed under the Public Records Act when the case was closed, and law enforcement efforts would be hampered significantly. Number 1783 MR. SCHWARTZ stated Section 7 clarified the mail-order catalog exemption in the existing telemarketing registration Act (AS Title 45, Chapter 63, Telephonic Solicitations). He related that a high- pressure sales telemarketer from San Diego had tried to say it was exempt from registering as a telemarketer because it had a mail- order catalog. However, the company telephoned people regularly, engaging in obnoxious sales pitches and harassing people to the point that there were many complaints to the Better Business Bureau and the DOL. Mr. Schwartz stated the DOL had taken this company all the way to Alaska Supreme Court and won; Section 7 would ensure the law explicitly set forth the state supreme court's view "that the mail-order catalog exemption ... is not such a broad exemption that it allow a telemarketer ... to telemarket to people over the phone and yet qualify as a mail-order catalog company." Number 1840 CHAIRMAN ROKEBERG questioned if the company mentioned was Distributel, Incorporated [Distributel, Inc. v. State of Alaska 933 P.2d 1137 (Alaska 1997)]. Number 1851 REPRESENTATIVE JOE RYAN asked how the people of Alaska are harmed by telemarketing, other than annoyance, to cause this particular action. Number 1880 MR. SCHWARTZ stated Congress has recognized nationally that Americans suffer $40 billion in losses annually from fraudulent telemarketing and Alaska is not an exception. Mr. Schwartz called Alaska a "victim state" and noted most telemarketing companies are located in a few areas: Las Vegas, Nevada; Atlanta, Georgia; Florida and Southern California. He said, historically, telemarketing has been an area in which the consumer has been very vulnerable to fraudulent and high-pressure sales pitches. Money can change hands almost instantly, Mr. Schwartz stated, when a telemarketer fraudulently obtains a consumer's credit card or bank account number. He noted the practice of recording the conversation and illegally convincing the consumer a binding sales contract has been made. Mr. Schwartz commented that Alaskans, particularly the elderly, are impacted by telemarketing fraud and in 1993, the legislature enacted a telemarketer registration law. More that 40 states have some sort of telemarketer registration law and Alaska was one of the last ones to adopt one. Mr. Schwartz said telemarketing is a very common consumer protection complaint category in Alaska and nationally. Number 1976 REPRESENTATIVE RYAN noted the consumer's responsibility when making a deal. Number 1992 MR. SCHWARTZ stated that Section 8 concerned the sale of business opportunities. It was, he commented, another area where consumers were "out-and-out defrauded," both in Alaska and nationally, and noted consumers were unable to effectively check out the validity of a business opportunity before paying money or signing a sales contract. Mr. Schwartz mentioned "late-night infomercials" and sales pitches to large groups of consumers, noting high-pressure sales were involved. Many states, he said, have business opportunity registration Acts. Mr. Schwartz stated the one contained in this bill is modeled after the telemarketing registration Act and requires the opportunity to seller to disclose, up-front, key information about the business opportunity so the consumer might be adequately informed before making a decision. Number 2071 CHAIRMAN ROKEBERG brought up the $75,000 surety bond requirement. Number 2078 MR. SCHWARTZ responded that the bond was a typical requirement in a business opportunity statute. Alaska has some surety bond requirements in other sections of the Unfair Trade Practices and Consumer Protection Act. He said paid solicitors for charitable solicitations require a $10,000 surety bond. In the sale of business opportunities, he stated, a $75,000 bond affords a minimal amount of protection to consumers. Mr. Schwartz mentioned the long list of exemptions similar those in the telemarketer registration Act. Number 2119 CHAIRMAN ROKEBERG clarified that the bond protected the person who made the investment, who could then sue against the bond. He asked if bonds were available and what premiums would cost for $75,000 in coverage. Number 2132 MR. SCHWARTZ responded it was his understanding the premiums would be a fraction of the face of the bond, but he was not sure of the rate. Number 2150 CHAIRMAN ROKEBERG noted the cost could be several hundred dollars, which, he said, could be an impediment to business sales activities in the state. He asked if that was the bill's intention. Number 2156 MR. SCHWARTZ stated, the intention is not to prohibit the sale of business opportunities. The goal, he said, is to give the consumer recourse if the business opportunity turns out to be deceptive or fraudulent, noting often sellers will not give refunds. He stated the business opportunity seller should easily be able to recoup the bond's cost through the high volume of sales at any given sales pitch. Mr. Schwartz said he did not think the bond requirement would discourage a business opportunity seller from coming to the state. Number 2197 CHAIRMAN ROKEBERG asked if it was possible to have a "blanket" fidelity bond across state lines or if the bond had to be written within an insurance jurisdiction. Number 2207 MR. SCHWARTZ stated the bond would certainly have to be valid in favor of the state of Alaska so that the consumer or the state could go after the bond. Whether that meant it had to be purchased in the state of Alaska or not, he said, he was not sure but thought it wouldn't. Number 2221 MR. SCHWARTZ stated Section 9 would repeal a confusing telemarketing exemption relating to the sale of securities. There are already some exemptions in the telemarketing law relating to the sale of securities, and he said this particular exemption is redundant and confusing; this change would be a "housecleaning" measure. He stated the rest of the bill concerns the effective dates, regulations and changes in the (indisc.) procedures to accommodate the business opportunity section. Number 2274 CHAIRMAN ROKEBERG asked if investment bankers or stockbrokers would be exempt would be exempt from the business opportunity section. Number 2287 MR. SCHWARTZ answered in the affirmative. He referred to exemption (6), page 17, which exempts a security regulated under the Alaska Statutes, and (7) which exempts a sale or offer where the person is registered by the United States Securities and Exchange Commission. Between those two exemptions, Mr. Schwartz said, investment bankers would be clearly exempted from this kind of legislation. Number 2315 REPRESENTATIVE RYAN asked what provisions have been made on the bond for a person to receive restitution who loses money in a fraudulent transaction. He asked if current statutes allowed that or was there something he was missing in the bill. Number 2335 MR. SCHWARTZ referred to the existing consumer's private right of action under the consumer protection Act. He said if the business opportunities bill is enacted, a consumer could use that existing right with regards to business opportunities. Number 2347 REPRESENTATIVE RYAN clarified his question, asking whether the following procedure would be correct: In an instance of wrongdoing, the bond would pay the state, and the individual who suffered the loss would have to go to court in a civil action to access that money collected by the state. Number 2366 MR. SCHWARTZ responded that was a possible procedure, but he said he did not know if money payable to the state would be available to the consumer, or whether the consumer would have to go directly to the company for restitution. Mr. Schwartz stated the consumer clearly does have a private right of action under the consumer protection Act but a court might have to decide whether or not the consumer could directly access the bond. He said the state can clearly go after the bond Number 2394 CHAIRMAN ROKEBERG noted there was a difference between surety and fidelity bonds. Number 2404 MR. SCHWARTZ stated the law clearly is designed to be a bond for the benefit of the buyer. He said this leads him to say the consumer could go after the bond in a private right of action. Number 2414 REPRESENTATIVE RYAN stated he assumed the bond's purpose would be to protect the buyer, and he asked how the buyer would go about "being made whole from the proceeds of that bond," if the state collected on the bond. Number 2429 MR. SCHWARTZ responded the state would certainly be able to collect the bond and specify, as part of the condition of collection, that the proceeds go to certain identified buyers who were victimized by the business opportunity seller in question. Number 2441 REPRESENTATIVE RYAN asked if there was any provision to ensure that in this bill. Number 2449 MR. SCHWARTZ stated he did not believe the DOL would be seeking that money for the state, because the DOL can already pursue civil penalties under the existing consumer protection Act and does not need to go after a bond to extract penalties from a fraudulent business. REPRESENTATIVE RYAN said, "(Indisc.) language that says the buyer will be made whole ..." MR. SCHWARTZ said, "Would go after the bond ..." [TESTIMONY INTERRUPTED BY TAPE CHANGE] TAPE 98-9, SIDE B Number 0001 REPRESENTATIVE RYAN stated, "... transaction and otherwise why do we want to collect this bond if there's not a mechanism to completely make the person, who suffered the loss, whole." Number 0018 CHAIRMAN ROKEBERG stated he thought the surety bond would be held in favor of the state because a fidelity bond could not apply, since both parties involved could not be known when the bond is made. He recalled that was the difference between a surety and fidelity bond. There is a cause of action on the part of the buyer, who, as he noted Mr. Schwartz had pointed out, could probably make a direct claim, or make a claim through the state. Or, Chairman Rokeberg said, the state could file a cause of action and recover from the bond, turning the proceeds over to the person who was defrauded. Number 0036 MR. SCHWARTZ noted that, since the bill does require that the bond be for the benefit of the buyer, that language, in and of itself, would prohibit the state from taking and retaining the bond rather than distributing it to an injured buyer. Number 0050 REPRESENTATIVE RYAN stated his concern that all money coming to the state goes into the general fund, with the exception of the permanent fund, school construction fund and dedicated funds. Noting the possibility incoming funds appropriated back to the DOL for damages might get "lost in the shuffle," Representative Ryan stated he was trying to find out how the injured person was going to made whole, and why the committee would want to pass this legislation if there wasn't a mechanism to ensure that the person could be made whole. Number 0067 MR. SCHWARTZ responded that there would be a distinct possibility a buyer would be able to made whole from the proceeds obtained from the bond, depending on the number of buyers defrauded. He said he did not think the money "would even see the state treasury" if the state obtained the bond proceeds. The proceeds would be ordered by a court, he said, to be paid directly to a buyer as a result of a victorious action under the consumer protection Act. Number 0090 CHAIRMAN ROKEBERG noted the "business opportunity circumstance" and asked how many complaints the attorney general's office had received on this type of activity in the last two years. Number 0119 MR. SCHWARTZ commented that complaints to the attorney general's office were more common in the past, attributing this to the activity level of the Better Business Bureau, which he said has fallen in recent years. He described two situations where Alaskans had been defrauded and he had taken successful action on behalf of these people for the state. He noted the attorney general's office has not taken individual complaints for the last 10 or 12 years so he was unable to provide statistics. Mr. Schwartz noted this was a national and Alaskan concern, and there were potentially many complaints. Number 0200 CHAIRMAN ROKEBERG stated SSHB 142 would be held over for further consideration and possible amendment. Number 0235 CHAIRMAN ROKEBERG called a brief at-ease at 4:20 p.m. The meeting reconvened at 4:30 p.m. HB 187 - SMALL BUSINESS DEVELOPMENT TAX CREDIT Number 0243 CHAIRMAN ROKEBERG announced the next order of business was HB 187, "An Act relating to a small business development tax credit under the Alaska Net Income Tax Act; and providing for an effective date." Number 0257 JEFF BUSH, Deputy Commissioner, Department of Commerce and Economic Development (DCED), came forward to testify. He cited DCED figures indicating 96 percent of Alaska businesses have 50 employees or less, the normal definition of a small business, and he stated 70 percent of Alaskans are employed by businesses that fall under this definition. Number 0286 MR. BUSH stated HB 187 is part of the Governor's proposal for Alaska business investment incentives, offering tax credits for capital, improving and expanding investments to small businesses. He stated it would apply to non-affiliated businesses with 50 employees or less, noting subsidiaries of larger businesses would be ineligible. The credit would amount to 10 percent of a business's investment on an annual basis, up to $100,000; therefore, the total maximum credit for any one business would be $10,000 in a year. Mr. Bush stated the other maximum would be 50 percent of business's total tax liability. Mr. Bush noted the bill has a fiscal note which shows approximately $2 million in fiscal impact. The committee needs to know, he said, that amount was calculated by Department of Revenue to be the financial impact to the state if every business qualifying for this investment credit took the maximum credit available through investment. Number 0355 CHAIRMAN ROKEBERG asked if Mr. Bush, as a member of the Administration, was taking exception to a fiscal note prepared by the Administration. Number 0360 MR. BUSH said he did not think he was taking exception, noting it was a very conservative fiscal note. Mr. Bush said the proposal was designed to help small businesses. He commented that a representative of the Department of Revenue was present to answer technical questions. Number 0402 REPRESENTATIVE COWDERY asked if HB 187's fiscal impact had been included in the Governor's current budget. Number 0415 MR. BUSH replied he thought the impact was probably not part of the budget calculation since the impact was attached to the fiscal note. Number 0429 REPRESENTATIVE COWDERY asked where the money would come from to make up the budget loss from this proposed tax credit. Number 0442 MR. BUSH stated there would be a reduction in overall general fund state revenues as a result of this bill. Mr. Bush said he could make what he thought was a legitimate argument: There is the hope there would be expanded business opportunities and expanded business investment through this tax credit, and in the long run there would be an increase in business activity and, therefore, an increase in tax revenue. However, he said, any tax credit program is a reduction in state revenues. Mr. Bush stated he thought the fiscal impact would be incorporated into the state budget if the bill passed. Number 0438 REPRESENTATIVE COWDERY stated the reason for his line of questioning was caution about bills with attached fiscal notes, in view of oil prices, et cetera. Number 0490 CHAIRMAN ROKEBERG noted Mr. Bush's testimony sounded like a particular theory of economics which holds, by decreasing taxes, economic activity increases and future gross tax revenues are enhanced. Chairman Rokeberg said it sounded almost like a Laffer curve or supply side economic theory. Number 0523 MR. BUSH commented he was not subscribing to that theory. He stated the only way this credit could apply was if a business increased investment, developing additional infrastructure and capital. He said the credit also involved a three year time frame. At the end of the three years, presumably, a business would have a greater infrastructure, more employees and a greater income, and hopefully after that, resulting greater tax revenues might be seen for the state. Mr. Bush said he does not think necessarily the tax credit directly caused the increased business activity, as the economic theory Chairman Rokeberg raised suggested. Number 0577 REPRESENTATIVE RYAN asked if the DCED had figures for the number of businesses or corporations in Alaska with 50 or fewer employees. Number 0585 MR. BUSH responded that 2,461 businesses with 50 or fewer employees pay corporate income tax, according to DCED figures. Number 0598 REPRESENTATIVE RYAN stated that was assuming over $100,000 gross income (indisc.). Number 0605 MR. BUSH responded in the negative. There are 59 corporations that pay over $20,000 in taxes and qualify as small businesses that would be able to take the maximum credit of $10,000, or 50 percent of their tax liability. He noted half of the 2,461 small businesses only pay between $1 and $100 in taxes. Number 0646 REPRESENTATIVE RYAN noted the liberalization of the limited liability company (LLC) law the previous year and asked if LLCs would qualify for the tax credit. Number 0657 MR. BUSH said he was not sure if LLCs paid corporate income tax, thus qualifying for the credit, and he directed the question to Mr. Bartholomew of the Department of Revenue (DOR). Number 0667 BOB BARTHOLOMEW, Deputy Director, Income and Excise Audit Division, Department of Revenue, came forward to testify. Mr. Bartholomew stated there are about 12,000 corporations in the state; 5,000 of these qualify as LLCs and subchapter S corporations, are not subject to the tax laws, and would not be eligible for the program. Number 0693 REPRESENTATIVE RYAN asked if a corporation not chartered in Alaska could qualify for the program. Number 0702 MR. BARTHOLOMEW responded it would be any corporation which pays Alaska corporate income tax that has the investment made in Alaska. He said he thought the bill required the investment to be made in Alaska. Mr. Bartholomew indicate a foreign corporation could qualify. Number 0717 REPRESENTATIVE TOM BRICE asked about the retroactive to 1997 effective date, questioning if that would be changed to 1998. MR. BUSH responded he had an amendment prepared which moved everything one year - the effective dates, the carry-forwards. Number 733 REPRESENTATIVE BRICE added in question, "And the repealer?" Number 0741 CHAIRMAN ROKEBERG asked Mr. Bartholomew for a gross number of corporations paying taxes in the state compared to the number fitting the small business definition. Chairman Rokeberg also requested the amount of the state's gross corporate tax receipts, excluding the petroleum companies. Number 0783 MR. BARTHOLOMEW stated the DOR has a prepared chart he could provide to the committee which shows the level of taxes paid by corporations. He noted page 3 of the fiscal note shows, matching the DOR's data with the Department of Labor's, the corporations with less than 50 employees. Number 0840 CHAIRMAN ROKEBERG referred to HB 232 in the 19th Legislature which was very similar in construction. He said the bill was referred to the House Finance Standing Committee and did not proceed further. Chairman Rokeberg asked for some history of that bill. Number 0863 MR. BARTHOLOMEW stated he was sure the DOR had been involved in the bill as far as fiscal notes, but he said he would have to research the files. Number 0870 CHAIRMAN ROKEBERG noted he would be interested in knowing whether the Administration had supported that bill. He added, to Mr. Bush, that the current bill sounded like a modest type of investment tax credit (ITC), noting ITCs used to be "in vogue" in the federal tax code. He asked Mr. Bush if the DCED had done any studies regarding the actions of other states to determine the actual economic effect of such a measure, and if there was any basis or rationale to know whether this bill would have its intended effect. Number 0940 MR. BUSH replied in the negative, stating the bill was modeled after the old federal investment tax credit system. Number 0958 MR. BARTHOLOMEW commented that he did not think, in the discussion which led to this bill's proposal, there had been such a macroeconomic analysis. He said he thought it was based on the flat to 1 percent growth rate in Alaska two years ago and the perception small business did not seem to be receiving the benefits larger companies may have received through lobbying efforts. The idea, he indicated, was that if a small business was willing to make a capital investment, the state would be willing to participate by giving a tax break. Number 1021 REPRESENTATIVE RYAN commented on the high cost of plane fares to Juneau for small businesses, and mentioned the general theory that if citizens are allowed to keep a little bit more money, they can do things to advance their livelihood. He called this advancement, capital investment. REPRESENTATIVE BRICE made a motion to adopt Amendment 1. Amendment 1 read: Page 2, line 8: Delete "1996" Insert "1997" Delete "2000" Insert "2001" Page 4, line 5: Delete "1997" Insert "1998" Page 4, line 7: Delete "2002" Insert "2003" Number 1066 CHAIRMAN ROKEBERG asked it there were any objections to Amendment 1. Hearing none, he stated Amendment 1 had been adopted. Number 1086 CHAIRMAN ROKEBERG closed the public hearing on HB 187, noting the presence in the bill packet of a questionnaire from the Alaska chapter of the National Federation of Independent Business (NFIB). Chairman Rokeberg asked if there was any further discussion of HB 187. Number 1142 REPRESENTATIVE KUBINA made a motion to move CSHB 187 with individual recommendations and accompanying fiscal note. Number 1149 CHAIRMAN ROKEBERG asked if there were any objections. Hearing none, he stated CSHB 187(L&C) was so moved. ADJOURNMENT Number 1207 CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing Committee meeting at 4:50 p.m.