HOUSE RESOURCES STANDING COMMITTEE WORK SESSION ON HB 341 October 24, 1995 9:12 a.m. MEMBERS PRESENT Representative Joe Green, Co-Chairman Representative Scott Ogan, Vice Chairman Representative Pete Kott Via Teleconference: Representative Bill Williams, Co-Chairman Representative Alan Austerman MEMBERS ABSENT Representative Ramona Barnes Representative John Davies Representative Eileen MacLean Representative Irene Nicholia COMMITTEE CALENDAR * HB 341: "An Act establishing a tax court to consider and determine certain taxes and penalties due and collateral matters, and amending provisions relating to taxpayer challenges to the assessment, levy, and collection of taxes by the state; and providing for an effective date." HEARD AND HELD (* First public hearing) WITNESS REGISTER JEFF LOGAN Legislative Assistant House Resources Committee State Capitol, Room 24 Juneau, AK 99811 Telephone: (907) 465-4931 POSITION STATEMENT: Provided sectional analysis HB 341. STEVE MAHONEY Tax Committee Representative Alaska Oil & Gas Association 700 G Street Anchorage, AK 99501 Telephone: (907) 265-6527 POSITION STATEMENT: AOGA supports reform. BERNIE SMITH Tesoro Alaska Petroleum P. O. Box 3369 Kenai, AK 99611 Telephone: (907) 776-8191 POSITION STATEMENT: Supports HB 341 DEBORAH VOGT Deputy Commissioner Department of Revenue P. O. Box 110400 Juneau, AK 99811-0400 Telephone: (907) 465-2300 POSITION STATEMENT: Department to introduce legislation. CHRIS CHRISTENSEN Staff Counsel Alaska Court System 303 K Street Anchorage, AK 99501 Telephone: (907) 264-8228 POSITION STATEMENT: The supreme court opposes the creation of a limited jurisdiction specialty court. KEVIN A. TABLER Land Manager UNOCAL P. O. Box 196247 Anchorage, AK 99519 Telephone: (907) 263-7600 POSITION STATEMENT: Supports HB 341 HAK DICKENSON General Tax Counsel Marathon Oil Company 5555 San Felipe Houston, TX 77056 Telephone: (713) 296-2023 POSITION STATEMENT: Supports HB 341 PREVIOUS ACTION HB 341 SHORT TITLE: ALASKA TAX COURT SPONSOR(S): REPRESENTATIVE(S) GREEN JRN-DATE JRN-PG ACTION 05/09/95 2042 (H) READ THE FIRST TIME - REFERRAL(S) 05/09/95 2042 (H) RES, JUD, FINANCE 10/24/95 (H) RES AT 09:00 AM ANCHORAGE LIO ACTION NARRATIVE TAPE 95-71, SIDE A Number 040 HB 341 - ALASKA TAX COURT CHAIRMAN JOE GREEN opens the meeting and discusses a special session called by former Governor Walter Hickel to consider former Senate Bill 377 relating to oil industry taxes. After the special session, CHAIRMAN GREEN states that he felt the state of Alaska does not treat its taxpayers fairly; not because of what the state asks them to pay but rather that the system seems divergent in view and when assessed and contested, the state assumes the role of prosecutor, judge and expediter. One agency, he said, assesses the tax and then, if appealed, the process requires that that same agency decides if the assessment is fair or unfair. If the taxpayer continues to appeal the assessment through the Administration on to the court, the judge and the court then decide the case on a brief written by the agency. HB 341, he states, was introduced as an option to the present system. As prime sponsor of HB 341, CHAIRMAN GREEN, says he hopes to end up with legislation that is workable, fair, and if not more precise, legislation that both the state and industry can gain from. Number 208 JEFF LOGAN, staff to Repesentative Green, provides a sectional analysis of HB 341: SECTION 1. establishes a tax court as a one-judge trial court. Section 22.12.020 allows the tax court to hear all cases involving AS 43.19, the multi-state tax compact; AS 43.20, the Alaska net income tax act; AS 43.21, the oil and gas corporate income tax; AS 43.55, the oil and gas production tax; AS 43.65, the mining license tax; and AS 43.75, the fisheries tax. (2) allows claims resulting from all the above laws to be heard in the small claims division (established further in bill). (3) allows the court to decide whether a proposed tax regulation is valid and gives the tax court the same powers of the superior court in these matters. Section 22.12.030 establishes that the venue where cases will be heard will be set by the supreme court. Section 22.12.040 sets out the reasons why the venue can be changed. Section 22.12.050 establishes when the tax court will be open for business. Section 22.12.060 states that the court can adjourn itself and call itself back into session. Adjournment does not prevent the court from sitting in at any time. Section 22.12.070 establishes how official court documents will be processed. Section 22.12.080 establishes qualifications for tax court judges and prohibits a person who has in the past four years been employed by the departments of law and revenue from serving as a tax court judge. Section 22.12.090 directs the governor to fill a vacancy within 45 days of receiving nominations from the judicial council. (b) establishes that a vacancy occurs upon death or resignation or ninety days after an election if a judge is not retained by the voters. Section 22.12.100 requires the tax court judge to take the oath of office. Section 22.12.110 states that the tax court judge is subject to approval or rejection by the voters and that the judicial council must conduct an evaluation of the judge before the election and make the results of that evaluation public. Section 22.12.120 allows the tax court judge to be impeached by the legislature for malfeasance or misfeasance and how the impeachment will be conducted. Section 22.12.130 restricts the tax court judge from practicing law or engaging in any activity for compensation if that conduct would interfere with his/her duties. (b) disqualifies the judge from the bench if they file for public office except as a delegate for a constitutional convention. Section 22.12.140 establishes the same salary for the tax court judge as for the superior court which is a range 28E, a monthly salary of $7,667.00. (b) requires judges to certify that they do not have decisions more than six months outstanding before they are paid. The court system already imposes this rule on itself. (c) allows for geographic cost-of-living adjustments. Article 2. Section 22.12.200 provides that the supreme court may adopt rules for taking an appeal to the tax court. Section 22.12.210 establishes that taxpayers can be tried de novo. (b) states that only those issues raised in the Department of Revenue administrative proceedings can be raised in court. However, if the court determines that other matters are important to the case it can be remanded back to the department. Section 22.12.220 establishes the burden of proof to be either preponderance of the evidence, which is the usual civil trial burden of proof. Section 22.12.230 establishes hearings before the tax court as public hearings and allows for confidential information to be protected. Section 22.12.240 requires the tax court to issue decisions in writing. Section 22.12.250 allows the court to appoint a panel of masters (three individuals) to collect and analyze technical information and prepare decisions subject to the judge's adoption. Section 22.12.260 allows the court to publish tax court decisions. Article 3. Section 22.12.300 establishes a small claims division within the tax court. Section 22.12.310 sets $15,000 as the threshold under which a small claim may be filed. Section 22.12.320 establishes the procedure for filing a small claim. Section 22.12.330 requires the clerk of the tax court to notify the Department of Revenue when a small claim has been filed. Section 22.12.340 allows the taxpayer to dismiss a small claims case anytime before a judgement is entered; a dismissal is with prejudiced and cannot be brought up again. Section 22.12.350 establishes that small claims hearings are informal hearings. The court may hear testimony and receive evidence and a party may appear before the court or be represented. Section 22.12.360 states that a small claim judgement is conclusion but is not a judicial precedent for other judicial matters. Number 418 MR. LOGAN continues with sectional analysis of HB 341. SECTION 2. AS 15.15.030(10) describes the ballot for the retention election of a tax court judge. SECTION 3. AS 15.35.092 states that the tax court judge will stand for retention at first general election at his or her third year in office. If approved, the judge will stand before the voters every six years thereafter. Section 15.35.094 prescribes that the tax court judge shall file a declaration of candidacy by August 1 of the year of his election. Section 15.35.096 sets the thirty dollar filing fee. Section 15.35.098 directs the director of elections to place the name of a properly qualified tax court judge on the ballot for election. SECTION 4. AS 15.58.050 states that the judicial council shall file with the lieutenant governor's office by August 7 of the year in which the general election is to be held with a statement including information on the tax court judge. SECTION 5. AS 15.58.060(a) establishes the $150.00 filing fee for the tax court candidates to pay if they want to put something about themselves in the voters pamphlet. SECTION 6. AS 22.05.010(a) asks the tax court for a list of courts to which an appeal as a matter of right may be taken. SECTION 7. AS 22.05.010(e) grants the right to appeal a Department of Revenue decision to the tax court. SECTION 8. AS 22.05.100 states that if a tax court judge is not retained by the voters, he/she cannot be appointed to fill a judicial vacancy for four years thereafter. SECTION 9. AS 22.07.060 does the same as section 8. SECTION 10. AS 22.10.020(d) superior court grants to the tax court jurisdiction in all tax matters and appeals from the Department of Revenue. SECTION 11. AS 22.10.150 is the same as sections 8 and 9. SECTION 12. AS 22.15.195 is the same as section 11. SECTION 13. AS 22.20.010 adds definition of the term "judicial office." SECTION 14. AS 22.20.022(a) allows the chief justice to reassign a case if a party or party's attorney feel they cannot get a fair trial. SECTION 15. AS 22.20.040 exempts from small claims proceedings the requirement that the U.S. government and corporations be represented by attorneys. SECTION 16. AS 22.20.110 states that the commissioner of public safety shall serve all process issued by the tax court as it does with the other courts currently. SECTION 17. AS 22.25.010(g) adds tax court judge and definition of judge for the purposes of the judicial retirement system and of the standards of judicial conduct. SECTION 18. AS 22.30.080(2) same as section 17. SECTION 19. AS 43.05.240(d) sets out the procedure to appeal a tax decision by the Department of Revenue and what action the court will take upon reaching a decision. SECTION 20. AS 43.05.240 establishes the threshold for or defines the final decision by the Department of Revenue for the purposes of an appeal to the tax court. SECTION 21. AS 43.05. Section 43.05.242 requires a taxpayer who appeals a Department of Revenue ruling to pay the undisputed portion of the levy plus any penalty and interest and then to provide satisfactory evidence to the tax court that the taxpayer is able to pay the balance. Section 43.05.244 allows the taxpayer or the Department of Revenue to credit any overpayment made by the taxpayer against the taxpayers tax liability for the current or subsequent years. Any amount not refunded within three years shall be paid to the taxpayer with interest. SECTION 22. AS 44.62.300 allows an interested person to get an opinion from the tax court as to the validity of the tax regulation. SECTION 23. TRANSITION sets out that a revenue ruling appealed to the superior court shall be heard by the tax court if the appeal has not yet been filed with the supreme court. (b) allows the tax court to hear new evidence that was not presented during the revenue administrative hearing. (c) allows a party whose case is has been referred to the tax court to request that the case be heard by a panel of masters. SECTION 24. Effective date clause. Number 585 MR. LOGAN concludes the sectional analysis. CHAIRMAN GREEN asks members if they have questions of staff. Via teleconference from Kodiak, REPRESENTATIVE ALAN AUSTERMAN asks clarification regarding the repeal of a decision made by the Department of Revenue under this bill, does that appeal go the superior court first or does it go straight to the tax court? MR. LOGAN responds that the appeal would go to the newly created tax court. CHAIRMAN GREEN comments that one of the reasons was the amount of time used in the current process of step-wise procedure when in most cases, if worthy of an argument, the case would end up in tax court anyway. This is a way to circumvent lost time; six months or more is often required to work its way through the process. Number 647 CHAIRMAN GREEN introduces STEVE MAHONEY, Alaska Oil and Gas Association. MR. MAHONEY reads his statement into the record: Good Morning, Mr. Chairman and Members of the Resources Committee. My name is STEVE MAHONEY. As the authorized representative of the Tax Committee of the Alaska Oil and Gas Association. I am here today to testify on behalf of AOGA regarding House Bill 341, which proposes to establish a special tax court at the Superior Court level within the Alaska Court System. AOGA is a trade association whose 18 member companies account for the majority of oil and gas exploration, production, transportation, refining and marketing activities in Alaska. We are grateful for this opportunity to offer our comments. HB 341, presents some very critical issues. To summarize, AOGA believes strongly that the present system of tax audits and appeals is flawed in two major ways, which I will describe in a moment. AOGA is not prepared at this time to take a position on the bill, nor to recommend specific amendments. But we do support reform and will continue to work on a definitive solution, and would like to set the stage with the following background. Two major flaws in the present system are, first, that it does not allow for tax appeals to be decided by a truly impartial decision-maker, and second, that the burden of proof is not fairly allocated between the taxpayer and the Department of Revenue. In order to explain to the Committee exactly what these problems are and why they are problems, let me begin with a brief review of how the present system works in terms of who does what, and when. As I do so, I would like to invite you to follow along by looking at the diagram illustrating the process, which appears on the page attached at the end of my written testimony. What I'm going to do is start at the top of that diagram and work my way down through the items in bold print. The process begins when the taxpayer files a tax return and pays the taxes due according to that return. This means, in the case of production taxes, that we will file a tax return at the end of next month for the oil and gas we produce this month. For the corporate state income tax, which is reported on an annual basis, we file our tax return for a given year in mid-October of the following year. In other words, we will file our income tax return for 1995 in October of 1996. Number 728 The filing of the tax return starts the clock running for the Department of Revenue (DOR) to audit the return. The statute of limitations gives DOR three years from the filing of the return in which to complete the audit and make claims for additional tax, if any, which the auditor contends is owed. This three-year period may be extended by mutual agreement of DOR and the taxpayer for however long and as many times as they may agree upon. For oil and gas taxpayers, DOR ordinarily audits two or three years' worth of tax return at a time. Usually the audit is not completed within three years from the filing of the earliest of the returns being audited, and DOR asks the taxpayer for one or more extensions for each audit. We taxpayers have cooperated by agreeing to at least one extension, and usually several. Upon the completion of DOR's initial audit, the auditors almost always send a bill for more tax to the taxpayer. The technical name for such a bill is "assessment." Very often the assessment or tax bill is issued to the taxpayer just before the extended limitations period expires. When a taxpayer receives a bill for more tax, it can choose to do one of three things; it can pay the bill, it can file an appeal of part or all of the bill and ask for an informal conference with DOR, or it can file an appeal on part or all of the bill and ask for a formal hearing before a DOR hearing officer. The taxpayer must make its choice within 60 days of receiving the bill for more tax. Within this same 60-day period the taxpayer must pay any undisputed portion of the bill. Number 770 If the taxpayer pays the bill, the DOR auditors cannot make any further claims for more tax after the expiration of the statute of limitations. Since the statute is so often on the verge of expiring when the tax bill is issued, choosing to pay the bill without contesting it effectively means that no further claims for additional taxes will be made for the tax periods covered by the bill. On the other hand, if the taxpayer appeals part or all of the assessment, then DOR continues to issue new claims for additional taxes at any time before the appeal gets into court. The original idea of the informal conference was to allow a taxpayer the opportunity to sit down with DOR auditors and their supervisors and informally discuss those matters which the taxpayer believes are due to simple mistakes or misunderstandings. This option particularly makes sense when both sides are operating in good faith because it allows obvious or simple errors to be corrected without getting into the much more expensive procedures of the formal hearing. The informal conference is conducted by a conference officer, who is usually a DOR employee in the "classified" service - that is, he or she has civil service protection as well as union protection and is not accountable, in terms of getting fired, for lapses or errors in judgment. After the informal conference with the taxpayer, the conference officer issues a written conference decision making any corrections which he or she deems warranted in light of the information presented during the conference. There is no time limit on DOR either for holding an informal conference after one is requested, nor for issuing a conference decision after the conference is held. Number 808 If the taxpayer disagrees with part or all of the informal conference decision, it may appeal the disputed portion(s) and must pay any undisputed portion of additional taxes which the conference officer finds to be owed. The taxpayer has 30 days from the time of the conference decision in which to file its appeal and request a formal hearing and bypass the informal conference as its third option when a tax bill is issued, and it does so by requesting the formal hearing within 60 days of getting the bill. The formal hearing by a hearing officer who is in the "partially exempt" service - that is, he or she serves at the pleasure of his or her immediate supervisor and the commissioner. The procedures for a formal hearing resemble those for a trial. Both sides get to have legal "discovery" - that is, each side can ask the other about the evidence it has regarding the case. Both parties can also file various motions before and after a trial. The actual hearing itself is transcribed or recorded, and that as well as the testimony and evidence submitted at the hearing, plus all the briefs et cetera, becomes part of the formal record of the appeal. The hearing officer acts as a judge in the sense that he or she rules on the meaning of the applicable statutes and regulations. The hearing officer acts as a jury in the sense of deciding which version of the facts is accurate when the two sides disagree about what actually happened. After the hearing the hearing officer writes a formal hearing decision, making findings of fact as part of his or her role as a jury, and making conclusions of law in the role as a judge. The hearing officer submits his or her written decision to the commissioner or the commissioner's designee (often the deputy commissioner or the chief hearing officer) for review and approval. The commissioner may direct the hearing officer to rewrite part or all of the decision, and in the past commissioners have often done so, sometimes going so far as to edit and rewrite the decision for the hearing officer. Despite the commissioner's potential involvement in drafting the hearing decision, the DOR won't disclose what the involvement actually is. This secretive nature of the process is especially troubling to taxpayers and colors perceptions about the fairness of the system. Once the hearing officer's decision meets the commissioner's approval, it is issued to the taxpayer and becomes final. As with the informal conference, there is no time limit on the department for holding a formal hearing after it has been requested, nor is there one for issuing the formal decision after the hearing is held. The taxpayer has 30 days from the issuance of the formal hearing decision in which to pay any uncontested portions of it and to appeal the rest to court. Now this is the "direct route" for the tax audit and appeals process as shown in the diagram attached to my written testimony. But it is DOR's position that the auditors may issue new claims for additional taxes at any time while the appeal over the original tax bill is still pending before the department. Each time they issue a new tax bill, the taxpayer has to start at "step 1" of the appeals process for that new bill, no matter how far along in the process the original tax bill may be. It is entirely possible that the same tax period will be audited and re-audited several times while the original appeal is pending, and indeed this has often been the experience of taxpayers. Number 888 So this is Alaska's present system of tax audits and appeals. While cumbersome, time-consuming and expensive, the real problems are, as I mentioned at the outset, the lack of an impartial party to hear and decide tax disputes and an inappropriate allocation of the burden of proof between the Department of Revenue and the taxpayer. To some extent these two problems overlap one another. As you probably gathered from my description of the present process, the hearing officer plays a key role in that process. The formal hearing is the counterpart of the trial in an ordinary lawsuit. The hearing officer not only controls the schedule for the formal hearing, but he or she also rules on the various motions that the parties may file, controls which evidence will be admitted and which excluded, and, of course, acts as judge and jury in writing the hearing decision. On appeal to the courts, the hearing officer's factual findings in the hearing decision are given great deference. To overturn such a finding, the taxpayer must show that it is "not supported by"...substantial evidence in light of the whole record "in the appeal." This does not mean that most of the evidence has to support the hearing officer's findings, only that there is some credible evidence -some evidence of substance- which supports them. In other words, where there is a dispute about what actually happened and both sides introduce credible but conflicting evidence about the events, the hearing officer can choose which witness or witnesses to believe and that choice will be upheld by the courts because it is supported by "substantial" evidence. Number 923 It is essential to Due Process to have an impartial person deciding which witnesses to believe, because which version of the facts is believed often determines the outcome of the case. Let me give an example that will be more familiar to most people than some arcane tax issue. Suppose there is a traffic accident at an intersection with a traffic signal. Each driver insists he had a green light, and they testify to that effect at trial. Suppose "Driver A" also has a witness who says that, even though he was 50 yards away from the corner, he saw that the light was green for "A" when "A" drove into the intersection. Suppose that "Driver B" not only testifies that he had the green light, but he also brings in two witnesses who were standing right on the corner and agree that "B" had the green light. Both versions can't be accurate, so which one do you believe? Obviously, its going to make a difference which version you believe, since your decision will determine who wins and who loses. Now suppose you are the jury and you decide, for whatever reason, to believe "A" and his single witness. If the courts apply the same standard to your verdict as a jury as they do in reviewing the findings of a DOR hearing officer, they will uphold your decision because there is evidence of substance supporting it even though "B" submitted more evidence by eyewitnesses who were both better located to see what happened. In other words, "B" had more evidence and better evidence, but the verdict against him will stand. If we take this example and apply it to a tax appeal before a DOR hearing officer, a disputed fact issue is a bit like having the question to be this: Did the taxpayer have the green light, or did the commissioner? The commissioner is ultimately responsible by law for collecting the taxes and pressing the state's claims for any unpaid taxes, and thus he or she has an interest in upholding the claims that he or she believes have merit. But in an impartial system, it would be the hearing officer, not the commissioner, who decides who "had the green light" on a disputed factual issue -DOR or the taxpayer. In Alaska, however, the hearing officer is an "at will" employee working for the commissioner. If a hearing officer rules against the department too often or on too big an issue, he or she can get into trouble and might even get fired. So there is a constant and not too subtle pressure on a hearing officer to believe DOR's witnesses and disbelieve those of the taxpayer. This is not impartiality. Actually, though, the situation is worse than that. The commissioner can participate directly in the writing of the hearing decision, even though he or she was never present at the hearing, because the hearing decision cannot become final without the commissioner's approval. This means that a commissioner can instruct the hearing officer to rewrite critical parts of the decision so as to better support the auditor's tax claims, or may even rewrite those parts for the hearing officer, as commissioner's have done in the past. In other words, the person with the greatest power to determine what the outcome is in an appeal over a disputed tax claim - namely, the Commissioner of Revenue- is the very person who has ultimate responsibility for making the claim in the first place. The head prosecutor is therefore able to act as judge and jury in tax appeals. Other states avoid this type of abuse in various ways. Those that use the same extremely high standard of deference to the hearing officer's finding as Alaska does, also have hearing officers with the greatest degree of independence from their tax commissioners. Other states let the tax commissioner have more control over the hearing officers, but their courts make an independent decision about which witnesses to believe. Such independent judicial review is often through a so- called "trial de novo," which is legalese for a "new trial" that is held by the court. Under either of these approaches taxpayers receive the impartial trier-of-fact which they are guaranteed under Due Process principles. Because this issue of a lack of an impartial tax tribunal in the Alaska system, there is an unfair and inappropriate allocation of the burdens of proof between DOR and the taxpayer. To a small degree this has already been discussed, in discussing what the taxpayer has to show to the courts in order to overturn an adverse finding by the hearing officer. But there is another important aspect to the burden-of-proof issue. Number 1013 The longer the time that passes before a tax claim is made, the harder it is to find evidence to prove or disprove the claim. Memories of witnesses fade, documents get harder to find, and perceptions of the world can and frequently do change with hindsight. Yet the department does not have to prove its tax claims, no matter how long after the fact they are first raised. They are, in the words of AS 43.05.245: "presumed sufficient for all legal purposes. However, nothing prevents a taxpayer from presenting evidence or other information on an appeal under AS 43.05.240 in order to rebut the presumed sufficiency (of the department's claims") This statute means that the taxpayer always has the burden of "presenting evidence or other information" to show that the auditors are mistaken. This burden still exists even if so much time has passed that all the evidence no longer exists. This is unfair. One way to fix this would be to shift the burden of proof to DOR for unduly late claims. This would restore fairness to those situations where the passage of time is so great that there is no evidence left one way or the other regarding the claim. There is also a complementary approach for making progress in these areas. This is in providing taxpayers with greater clarity about exactly what their tax obligations are. The clearer the rules are, the more likely it is that the correct amount of tax will be paid in the first place. This means that the audit issues will be much smaller that they have been in terms of the dollars at stake. Under Alaska's oil and gas tax rules in the past, enormous sums of money were riding on the outcome of the appeals for only a relative handful of taxpayers. Any tax appeals system works better when smaller amounts are riding on the outcome of the appeals, and probably even the present system would have worked better if the stakes in each oil and gas case hadn't been so high. AOGA is hopeful about making progress to improve the clarity of the tax rules. As many of you may recall from previous state studies, uncertainty in the fiscal rules is a significant disadvantage that Alaska has in the worldwide competition to attract dollars for new capital investments here. AOGA is exploring ways to improve the present system. Some of them may be through new tax regulations. Some may require legislation. Clearly, we would prefer to come back to you with a consensus about any legislation that may be needed. But until we complete our exploration of these possibilities, we are simply unable to recommend whether any changes to HB 341 are desirable, and if so, what those changes might be. We hope, Mr. Chairman, that you and the committee will understand our situation. We are grateful for the support that has been shown by the fact that HB 341 has been introduced, and by the fact that this committee considers these matters important enough to take them up at this hearing. We are counting on your continued support and on the good faith of everyone interested in these issues. Working together, we can achieve a clear and sufficient system of taxation that no longer works to impede and discourage investment in Alaska. And that will be to the benefit of us all -and an achievement in which we can all take pride and satisfaction. Number 1080 CHAIRMAN GREEN asks members if they have questions of MR. MAHONEY. REPRESENTATIVE AUSTERMAN refers to AOGA's chart entitled Alaska's Present Tax Audit and Appeals Process and asks whether the system will change because the system is still required to get to tax court. MR. MAHONEY responds that the system of formal and informal hearings would be different in relation to (our) ability to go into a tax court de novo. Our facts would be brought to light to an impartial hearing officer, which would be the tax court judge. Number 1113 REPRESENTATIVE AUSTERMAN asks further clarification regarding the appeals process asking if the bill still allows for the informal conference. MR. MAHONEY replies that the informal conference is an option. There are many issues with taxpayers that are resolved in informal conference and we resolve some issues and not resolve others and go further in the process if we choose. If we resolve those issues we would pay the tax due and any interest on top of that and then just move forward with any issues that are unresolved. Number 1165 REPRESENTATIVE OGAN asks why there is almost always additional assessment after a taxpayer pays his bill and it is audited? Is there some major ambiguity on the clarity of the tax regulations? He continues, asking the author of the bill if the bill is trying to fix the symptom of the problem rather than addressing a lack of clear tax policy? CHAIRMAN GREEN says that HB 341 does not address trying to rewrite Department of Revenue regulations. He gives an example saying that if there is any credibility in my disputing your tax, I am going to take it to the highest possible decision maker. That process of making the final decision is what HB 341 addresses. Is this a fair review or is it a stacked deck against those who appeal their taxes? TAPE 95-71, SIDE B Number 000 MR. MAHONEY discusses audit periods that may have additional assessments. He continues, saying there are numerous items, issues and areas that there can be disagreement on. The taxes in Alaska are self-assessed taxes. The taxpayer reads the statute and regulations and makes a determination as to what they say and files its taxes accordingly. Any two people reading the length of documents that we have and the plethora of regulations that we have will likely come out with different ideas of what they say and that's basically what occurs in most of the assessments. Number 066 MR. MAHONEY continues, saying there have been strides recently in clarifying regulations with the department. There are ongoing discussions with the Administration as we speak and over the past about the systems as they are and the regulations as they read. We are working towards clarity on those issues. The major issue that we see is that if an auditor comes up and says you owe more taxes; the reasons that that assessment has been issued, the facts underlying why the assessment was issued, and why the disagreement occurs: all the burden shifts to the taxpayer. That's what this bill is trying to clarify. Number 147 BERNIE SMITH, Tesoro Alaska Petroleum Company, testifies in support of HB 341 agreeing with testimony of the AOGA. He feels a taxpayer should be entitled to an independent and impartial review of any tax dispute. In Alaska, he says, this does not always happen for just disputes arising from any tax administrated by the Department of Revenue or any ad valorem tax. Our concern is more than a just a desire to have a tax court; we want an even and fair playing field in Alaska tax matters. HB 341 is also concerned with some of the same issues. MR. SMITH says the current system infringes on the taxpayers due process rights by requiring them to present their case to the Board of Equalization. He continues the discussion elaborating on policy and procedures of the Board of Equalization saying the board is a political body required by law to decide what evidence is allowed into record. The board also has arbitration rules that may effect the trial record. MR. SMITH gives an example: the Kenai board allows a taxpayer only thirty minutes to present their case, he says. This kind of time limitation restricts the effects of the taxpayers due process rights, and taxpayers must have enough time to present their case, he states. Number 280 DEBORAH VOGT, Deputy Commissioner, Department of Revenue, expresses her appreciation for the opportunity to address the department's dispute resolution system. MS. VOGT relates that assertions made by earlier speakers were not new to the department or even the past three Administrations. She informs the committee that the department recognizes that there may be reasons to change the system currently being used. She said certainly one of the largest reasons is the taxpayers perception. There is a perception that the dispute resolution process is unfairly biased against the taxpayer and that perception is not going to go away. The other reason that we might want to think about changing the system is that it is difficult for the department. The current Administration, she informs the committee, is committed to exploring alternatives for changing the system. MS. VOGT says, early in the present Administration, department staff contacted every state in the United States to talk to them about their dispute resolutions systems. She relates that Alaska is in the distinct minority among states in the way the system works. But, Alaska is not alone, there are several other states that use the exact same process and it is a process that has been upheld over and over by the courts. It is a process used by many federal agencies and in every court, to her knowledge, that has addressed the issue of it is appropriate for the same agency to be reviewing the facts and deciding the case, has upheld the process as fair. MS. VOGT continues her testimony -through a departmental contract with the Department of Law, expert attorney Paul Frankel, Morrison & Foerster, was retained. Attorney Frankel had consulted with more than twenty states on their tax resolution procedures and given advice to those states. The department hired Mr. Frankel to review Alaska's system, laws and regulations. Mr. Frankel recommends (1) the system should be independent; (2) the taxpayer should be able to have its factual determinations made in an evidentiary hearing before it is required to pay the tax; and (3) the judge(s) in the system should be tax professionals. The Department of Revenue has requested permission from the governor to introduce a bill this session that addresses the department's dispute resolution system. The main approach, she says, would be to move the hearing function outside of the Department of Revenue, but leave it within the executive branch of government. She adds, not have it be a tax court but a hearing system similar to what we have except divorced from the department, and not reviewed by the commissioner and not subject to commissioner approval. Number 480 MS. VOGT responds to earlier remarks about the department saying that the Department of Revenue has made dramatic progress from the early years and is close to current with the oil industry on severance and corporate income taxes. Referring to HB 341, she suggests that a tax court that follows along after the unchanged procedures to the department is not her idea of streamlining the process. Other particular elements to HB 341 she feels disturbing are: (1) the fact that a judge can be preempted; (2) a problematic part of the legislation is the qualifications of the tax judge; and (3) it is not a good idea to create a judicial system to resolve the problem. Number 720 CHAIRMAN GREEN refers to Deborah Vogt testimony regarding moving the hearings outside of the Department of Revenue. MS. VOGT responds that the idea would be to have the evidentiary hearing, the fact finding hearing, and the de novo proceeding outside the department. Number 816 CHAIRMAN GREEN converses with MS. VOGT concerning streamlining dispute resolutions and fair and efficient procedures for getting those tax disputes resolved. Number 868 CHAIRMAN GREEN asks MS. VOGT when the committee can expect to receive the new legislation from the department. MS. VOGT replies that the bill will be introduced this session. Number 898 REPRESENTATIVE SCOTT OGAN says that one of the problems that has been identified is that oil tankers go to all different locations and different markets and have different prices. Is there a simple way to figure this out with an established price index for the day or the week? MS. VOGT responds that under the regulations, the department now uses published prices for various markets for west coast price, the gulf coast price and the mid-continent price. But you still have the problem of one taxpayer has, for this particular month, more efficient tankers than others and the transportation costs is still open to large controversies. The discussion continues regarding price fluctuations in the marketplace. Number 1017 REPRESENTATIVE PETE KOTT asks if the Administration has given any regard to creating an independent entity such as the Department of Labor Workers' Compensation Board. In the discussion that ensued, MS. VOGT stressed that tax professionals are the best qualified. Number 1135 Responding to comments about the proposed legislation from the chair, MS. VOGT clarifies that what the department is envisioning is moving the formal hearing function outside the department and making the informal conference mandatory instead of optional. TAPE 95-72, SIDE A Number 0000 MS. VOGT continues her discussion on the proposed departmental legislation saying she believes that by taking the hearing section out of the Department of Revenue so that a fresh look was given to the factual determinations; and then it went on its normal course of appellate review through the superior court and supreme court, it would shorten the process. Number 050 CHRIS CHRISTENSEN, Court Counsel, Alaska Court System, begins his testimony remarking that as a general rule the supreme court takes no position on legislation. The only exception is legislation such as HB 341 which directly effects the internal operation of the judicial branch. He advises the committee that the supreme court opposes the creation of a limited jurisdiction specialty court. This opposition is long-standing and relates to the concept of specialty courts in general rather that a specific type of court which is created by HB 341. MR. CHRISTENSEN provides further background discussing examples of multi-judge specialty courts in states with large populations such as New York. Alaska does not have that kind of case load, he said. To give you an example, the superior court judges here in Anchorage each carry a caseload of about 800 cases. While there are relatively few tax cases, some of them might be very big, but they are relatively few. My guess is, MR. CHRISTENSEN continues, that a tax judge will probably spend a tremendous amount of his or her time hearing other cases (divorces, torts, contracts) because there really isn't the tax caseload to keep such a judge busy. He relates that there are very few judges in Alaska specializing in tax cases. Number 221 MR. CHRISTENSEN, discusses examples of preempting certain judges saying if the purpose of creating a one-judge tax court is to have a specialist. Somebody who is really an expert in tax law and then having that judge preempted negates the whole purpose of creating the tax court. Number 285 KEVIN A. TABLER, Land Manager, UNOCAL, comments that his company has a significant presence in Alaska having oil and gas operations in Cook Inlet, an ammonia and urea plant in Kenai and other interests on the north slope. MR. TABLER states his view of an independent tax tribunal is a good idea and Union should support this bill or other bills that offer this type of independent judicial review for tax matters. Union Oil supports the basic premise that a judicial tax forum not connected with a Department of Revenue or a tax commissioner should be available in all states and not just Alaska. Number 395 HAK DICKENSON, General Tax Counsel, Marathon Oil Company, testifies saying that Marathon has been in Alaska for a number of years. Marathon is one of the first companies to come to Alaska. Along with UNOCAL, Marathon discovered the Kenai gas fields in 1959. MR. DICKENSON states he is encouraged that the Department of Revenue is considering the introduction of a bill that will work toward resolving some of the process of hearing matters. MR. DICKENSON reiterates that the perception for the state of Alaska Department of Revenue, which is real, is that most people do not think they can get a fair shake here. Taxpayers simply want a fair hearing on their disputes. At the administrative hearing, because the system is so tilted in favor of the Department of Revenue, it is virtually impossible for a taxpayer to win any meaningful issue. At least any issue that involves any dollar amount. MR. DICKENSON emphasizes, "Why is the Alaska system so tilted in favor of the Department of Revenue?" First, he says, as you have heard, the tax commissioner is both the auditor and hearing officers' supervisor. He or she is the judge, jury and prosecutor. The auditors ultimately report to the commissioner and the hearing officer also reports to the commissioner. What is missing in the Alaska system is an effective procedure for checks and balances between the audit process and the hearing system. In the Alaska hearing system, the commissioner who is sometimes a lawyer and sometimes not finally decides whether he will accept a hearing officer's recommendation, full or partial, or reject the hearing officer's recommendation all together. The hearing system in the state of Alaska is substantially flawed, he exclaims. It appears that Alaska is only one of four states that does not have either an independent hearing officer or a trial de novo. "What can the legislature do to correct the system in Alaska?" "What can the legislature do to level the playing field?" MR. DICKENSON continues saying that one remedy would be to create a tax court, which HB 341 call for. The Department of Revenue does not need to be engaging in any over-zealous actions to collect taxes nor is it necessary that the hearing procedure be rigged to lopsidedly favor the tax commissioner. Number 755 MR. DICKENSON concludes his testimony quoting from the Internal Revenue Service bulletin which describes their mission: "The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of our products and services; and performed in a manner warranting the highest degree of public confidence in our integrity, efficiency and fairness." The Internal Revenue bulletin goes on to provide a statement of principles of the IRS Administration: ..."The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue is determined by Congress. With this in mind, it is the duty of the Internal Revenue Service to carry out that policy by correctly applying the laws enacted by Congress. To determine the reasonable meaning of the various code provisions in light of the Congressional purpose in enacting them. To perform this work in fair and partial manner with neither a government nor a taxpayers point-of-view." MR. DICKENSON encourages the Department of Revenue to adopt similar mission statements and principles as the IRS. Number 850 The discussion continues between MR. DICKENSON and MS. VOGT regarding the proposal for an independent hearing officer within the executive branch versus the creation of a tax court. Number 959 REPRESENTATIVE OGAN states that ordinary people placed in a position of making a judgement do not necessarily have to be experts on it. The legislature and jury system are good examples, he says. There are lay jurors that know nothing about a situation. It might be an equitable system to resolve these conflicts. Number 977 REPRESENTATIVE KOTT responds to the chair that most of our boards and commissions do have lay people involved, but they also have professionals from industry and areas that the board in addressing on the board. While the lay person perspective is a good approach, we also have to have somebody more of an expert in that area. Number 998 MS. VOGT informs the committee that she and Commissioner Condon have looked at a mission statement for both of the tax divisions. The IRS mission statement was included in that review along with mission statements from other states. MR. CHRISTENSEN interjects that the department's mission statement is very similar to the IRS. Number 1021 CHAIRMAN GREEN summarizes testimony at the hearing and says maybe the final decision should be removed from the Department of Revenue and there must be someway to streamline the whole process so that we never again allow ourselves to be encumbered. The chairman states that the committee will take today's input, he encourages additional input, and revise the bill to the point that it is a workable bill. If the governor, or the department through the governor's office comes in with a different bill that does the same thing, that's fine and I will drop off. My concern is that we do not let this issue go unresolved just because we want to presume it will go away. Number 1065 ADJOURNMENT The meeting was adjourned at 11:17 a.m.