HOUSE RESOURCES STANDING COMMITTEE January 24, 1996 8:03 a.m. MEMBERS PRESENT Representative Joe Green, Co-Chairman Representative William K. "Bill" Williams, Co-Chairman Representative Scott Ogan, Vice Chairman Representative Alan Austerman Representative John Davies Representative Pete Kott Representative Don Long Representative Irene Nicholia MEMBERS ABSENT Representative Ramona Barnes COMMITTEE CALENDAR HOUSE BILL NO. 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." - PASSED CSHB 341 (RES) OUT OF COMMITTEE PREVIOUS ACTION BILL: 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 10/24/95 (H) MINUTE(RES) 01/19/96 (H) RES AT 09:00 AM CAPITOL 124 01/19/96 (H) MINUTE(RES) 01/24/96 (H) RES AT 08:00 AM CAPITOL 124 WITNESS REGISTER TOM WILLIAMS Alaska Tax Counsel BP Exploration, Incorporated P. O. Box 196612 Anchorage, AK 99510 Telephone: (907) 564-5955 POSITION STATEMENT: Testified in support of HB 341. DANIEL M. SECKERS Tax Counsel EXXON 3301 C Street, Suite 400 Juneau, AK 99503 Telephone: (907) 564-3776 POSITION STATEMENT: Testified in support of HB 341. NORMA CALVERT Marathon Oil Company P. O. Box 3128 Houston, Texas 77040 Telephone: (713) 296-3915 POSITION STATEMENT: Testified in support of HB 341. BEVERLY WARD ARCO Alaska, Incorporated 134 North Franklin Street Juneau, AK 99801 Telephone: (907) 586-3680 POSITION STATEMENT: Testified in support of HB 341. DEBORAH VOGT Deputy Commissioner Department of Revenue P. O. Box 110405 Juneau, AK 99801-0405 Telephone: (907) 465-2300 POSITION STATEMENT: Gave Department of Revenue's position HB 341. ROBERT BRIGGS Assistant Attorney General Department of Law P. O. Box 110300-0300 Juneau, AK 99801 Telephone: (907) 465-3600 POSITION STATEMENT: Addressed the Governor's Bill HB 427. ACTION NARRATIVE TAPE 96-6, SIDE A Number 000 CO-CHAIRMAN JOE GREEN called the House Resources Committee meeting to order at 8:03 a.m. Members present at the call to order were Representatives Green, Williams, Ogan, Austerman, Davies, Kott and Long. Representatives Barnes and Nicholia were absent. HB 341 - ALASKA TAX COURT CO-CHAIRMAN GREEN discussed committee substitute for HB 341, Version "K," adopted at the Resources meeting of January 19, 1996. He said the Administration has introduced a bill on the same subject, but HB 427 does not have a Resource Committee referral. He said his intention is to pass CSHB 341 to House Judiciary where the questions or differences between the two bills would be better addressed. Co-Chairman Green said House Judiciary will form a subcommittee to iron out the differences between the two bills and, hopefully, end up with a compatible bill. CO-CHAIRMAN GREEN said the Administration, the department and the sponsor all agree that the state's current tax structure and appeals process is in need of repair. He said he would begin with testimony from witnesses on the teleconference network. Number 266 REPRESENTATIVE JOHN DAVIES asked the referral path of the Governor's bill, HB 427. CO-CHAIRMAN GREEN said HB 427 has a different path. REPRESENTATIVE DON LONG said HB 427 had been referred to State Affairs, Special Committee on Oil and Gas, Resources and Finance. REPRESENTATIVE DAVIES said the only committee that both sets of bills come to, besides Finance, is Resources. He suggested that a subcommittee of Resources would be a more easily achieved event. CO-CHAIRMAN GREEN said the "sticking point" is the resolve that needs to be done on the legal aspects. He said this can be better served by the Judiciary Committee. The fact that the bill needs to be changed is a resource issue, but it is not the purview of this committee to act on judiciary matters. REPRESENTATIVE DAVIES commented that the Governor's bill did not get a Judiciary referral. CO-CHAIRMAN GREEN said the Governor's bill can still be addressed by a House Judiciary subcommittee even though it does not have a referral. He contended the issues are better addressed by the people who consider judicial issues. He said if there is a significant amount of concern, the Speaker of the House can assign HB 427 to the House Judiciary Committee. Number 636 TOM WILLIAMS, Alaska Tax Counsel, BP Exploration, Incorporated, testified from and Anchorage and read his testimony into the record: "Good morning, Mr. Chairman and Members of the Committee. My name is Tom Williams, and I am Alaska Tax Counsel for BP Exploration (Alaska), Incorporated. Thank you for this opportunity today to testify on behalf of BP regarding House Bill No. 341 and, in particular, on work draft `K' of a Committee Substitute for the Bill, which is dated January 17, 1996. MR. WILLIAMS said, "Alaska's present system of tax appeals needs reform. Present law makes the Commissioner of Revenue responsible for acting as prosecutor, judge and jury in tax appeals. In other states these functions may also be combined within one agency. But in those states the potential problems from combining all three functions is avoided in practice by delegating and dividing them up among several different people or divisions within the agency. In Alaska, with fewer than a dozen taxpayers paying some 80% of the State's total unrestricted General Fund revenues, the stakes in the tax appeals have often been so material to the State that the delegations of authority here have failed to maintain a necessary division of these three functions. MR. WILLIAMS continued, "The dangerous overlapping, in practice, of prosecutorial, judicial and juror roles within the Department has been worsened by the considerable deference given by the courts to formal hearing decisions issued by the Department. On issues where the facts are in dispute, the factual findings by the hearing officer are upheld unless they are `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 be some credible evidence - some evidence of substance - which supports them. This puts an all but impossible burden of proof on the taxpayer, despite the fact that the hearing officer's findings cannot become final without the signature of the person who is statutorily responsible for taking `all steps necessary and proper to enforce full and complete compliance with the tax...law of the state[.]' And the fact that hearing officers serve at the pleasure of the Commissioner further undercuts their independence as fact-finders. Moreover, even on questions of legal interpretation, which the judiciary normally views as its own particular province, if the courts defer to the Department's interpretation if they decide it involves the special expertise of the agency, and few other areas of the law are so technical and subject to agency expertise as tax. MR. WILLIAMS said "Reform of the present system can proceed along two avenues. One is to increase the actual independence of the people hearing tax appeals from influence by the Commissioner of Revenue. The other is to make the standard for reviewing the Department's decisions in court less deferential to the agency's positions. Number 869 MR. WILLIAMS testified, "There are now no less than three different proposals before the legislature to reform the present tax appeals system, each of which goes varying distances down the two avenues for reform. The first is HB 341 as originally introduced. In that version, the Bill would create a new tax court in the Judicial Branch to hear tax cases. This clearly goes as far as possible toward making the tax tribunal independent of the Department's influence, and minimizes the need and opportunity for judicial deference to agency interpretations of the law. MR. WILLIAMS stated, "The second proposal is the draft CS that is before the Committee today. The key feature of the CS is the opportunity for taxpayers to opt for a trial de novo in superior court after an informal conference with the Department, instead of the present process of having a formal hearing before a departmental hearing officer with a subsequent appeal to the courts to review the hearing decision. Trial de novo is a legal term that means having a trial of the facts as if there had been no earlier fact-finding by the agency. The CS would ensure that the `jury' role will be played by an impartial judge, instead of a departmental employee. But trial de novo would still allow the courts to defer to the agency's expertise in interpreting the law whenever they felt the matter was one involving agency expertise, so in this sense the draft CS does not go as far as the original Bill in providing for independence in the adjudication of tax cases. MR. WILLIAMS continued, "The third proposal on the table is the legislation recently introduced by the Governor, HB 427 and SB 224. That legislation would create a panel of administrative law judges within the Department of Administration to hold the formal hearings in tax cases, and those hearings would be on a de novo basis. Being in a separate department, these "ALJs" would be considerably more independent of the Commissioner of Revenue than the hearing officers are under the present system, although they would appear to be less absolutely independent of Executive Branch influences than actual judges in the Judicial Branch would be. Offsetting this, however, is the fact that the ALJs would have tax expertise to match that of the Department of Revenue itself, so there should be less occasion to defer to the Department's interpretations of the law on the grounds of agency expertise than there would be with trial de novo in superior court. MR. WILLIAMS said, "Let me make BP's position as clear as possible. All three proposals as currently drafted have some technical issues that should be addressed before being enacted. But assuming those technical matters can be taken care of, any one of the three proposals would significantly reform and improve the tax appeals system from what Alaska has now. This means that the most important thing, from BP's perspective, is to pass one of these reforms. Which one it is is less important than the fact that it pass. The worst possible outcome this Session would be to fail to pass anything, or to pass one and have it vetoed. MR. WILLIAMS concluded, "We in BP are confident in your ability to find a reasonable accommodation that will provide true reform in tax appeal procedures. We look forward to helping you in that effort in whatever way we can." Number 1055 CO-CHAIRMAN GREEN referred to the flow chart in the packet requested by Representative Austerman. He said the chart does help to understand the process. Number 1070 DANIEL M. SECKERS, Tax Counsel, Exxon, testified from Anchorage and read his testimony into the record. "Mr. Chairman, members of the committee, my name is Dan Seckers. I am Exxon's tax counsel here in Alaska. I want to thank you and the committee for allowing me the opportunity to testify before you today. MR. SECKERS continued, "At the onset, I would like to say that Exxon appreciates the willingness of this Committee to address at today's hearing the important issue of how the current tax dispute resolution process in Alaska can be improved. We believe that with certain changes a fairer and more efficient tax appeal process can be achieved that would benefit all parties to the process. We also believe that any substantive reform to the current tax dispute resolution process would be a step towards improving the business and investment climate in the state. A fair and impartial tax appeal process would enhance the working relationship between the state and the oil and gas industry and would send a clear signal to potential investors that Alaska wants to be viewed as a state willing to resolve tax disputes in a straightforward and impartial way. MR. SECKERS said, "Given that there have been two proposals introduced this session which address the tax dispute resolution process in Alaska, I plan to address general principles rather than comment on a specific bill. I would like to share with you some key elements that we will use to evaluate any proposal designed to improve the tax dispute resolution process in the state of Alaska. MR. SECKERS testified, "First, Exxon believes than an appeal from the Department of Revenue's informal conference decision on a tax dispute must be heard, and the facts and law must be developed, outside the control of the Department of Revenue. Having the collection of taxes and resolving tax disputes within the same agency can fuel the perception of unfairness. Moving the tax appeal process outside the Department of Revenue would go a long way towards persuading Alaska taxpayers that the tax appeal process contains the essential element of fairness. MR. SECKERS continued, "Second, the person presiding over the appeal must be independent. Currently, the person assigned to hear an appeal works for the Commissioner and can be dismissed for any reason by the Commissioner. If the person presiding over the appeal believes that his or her decision may impact his or her future job security, then that person's judgment has been compromised because such person is not free to decide the appeal based solely on the weight of the evidence presented and the applicable law. To maintain his or her independence, the person presiding over the appeal should be appointed for a fixed term of years and be subject to termination during that term only for cause. MR. SECKERS said, "Third, the person presiding over the appeal must be required to resolve all questions of fact based on the majority of the weight of the evidence presented during the appeal. This preponderance of the evidence standard should be used to resolve all questions of fact unless another standard has been established by law for a particular question. MR. SECKERS testified, "Fourth, we believe the standards by which questions of law will be resolved should be clearly stated. To be truly impartial, the person presiding over the appeal must be required to resolve all questions of law under the person's own independent interpretation of what the law means after hearing all the evidence submitted by the parties. The only exception to this should be for those areas of law legislatively delegated to the Commissioner by you, the members of the legislature. With regard to these areas, deference should be given to the position taken by the Department of Revenue but only if the position has a reasonable basis in law. Any areas where judicial deference is to be given to the Department of Revenue should be codified by you so that both the taxpayer and the Department of Revenue know such areas of deference. MR. SECKERS stated, "Fifth, the appeal process should allow all parties to the appeal to gather relevant evidence through a fair and reasonable discovery process. MR. SECKERS continued, "Sixth, the appeal process should allow the introduction of fair and reasonable evidence. The admissibility of any evidence should rest with the discretion of the person presiding over the appeal. No evidence should be statutorily determined to be irrelevant or inadmissible for all purposes. MR. SECKERS concluded, "Finally, it is possible to argue that it may be helpful if the person presiding over the appeal is experienced in the field of tax law. While such experience may not be essential to providing taxpayers with an impartial tax appeal process in Alaska, it could be helpful towards the efficient and speedy conduct of the appeal. Such experience, however, is not of sufficient importance to override impartiality in any appeals process. "Mr. Chairman and members of the Committee, Exxon stands ready to work with you, the Legislature, the Governor and his Administration in achieving meaningful reform to the current appeal process through incorporation of the key elements I have discussed here today. Working together we can further our objective of obtaining a fair, impartial and efficient tax dispute resolution process, one that sends a positive signal about the business climate in Alaska." Number 1344 CO-CHAIRMAN GREEN invited Norma Calvert to come forward. Number 1380 NORMA CALVERT, Marathon Oil, read her testimony into the record: "Good morning Chairman Green and members of the House Resources Committee. My name is Norma Calvert and I am here today representing Marathon Oil Company. Chairman Green, before I share with you Marathon's comments on the committee substitute for House Bill 341 (the Tax Court Bill), I would like to thank you and your staff, along with the committee members, for your dedicated efforts to improve the tax appeals process in Alaska. We believe the system can be modified for the benefit of the taxpayers and the state of Alaska. MS. CALVERT continued, "As stated in Marathon's testimony given at the October hearing, we strongly support the modification of the appeals process. Although we believe a tax court as proposed in HB 341, as originally introduced, would provide the most impartial process of resolving tax disputes, we also understand the concerns raised at the October hearing by the Supreme Court system with respect to establishing a specialty court in Alaska due to the small numbers of taxpayers and cases to be resolved. MS. CALVERT said, " Our testimony in October gave detailed synopsis of our concerns of the current system. To review, our number one concern is the empowerment within the Department of Revenue to audit, issue assessments and govern the hearings for dispute resolution. If the taxpayer does feel it necessary to appeal the Department of Revenue's decision, a de novo review is not given at the superior court level and great deference is given to the Department of Revenue's decision, making it nearly impossible to obtain an impartial review of the case. MS. CALVERT said, "Recognizing the complications in forming a tax court in Alaska, we support the Committee's substitute bill to allow for a de novo hearing outside the Department of Revenue at the superior court level. In continuing your efforts to improve the tax appeals process, we would like for you to consider the essential characteristics of an unbiased system: the appeals process should be independent of the audit and assessment process, outside the Department of Revenue; taxpayers should be allowed a de novo hearing before an impartial tribunal; and the burden of proof on questions of fact should be a preponderance of evidence standard. We believe a de novo review at the superior court level provides resolution to the concerns we have expressed and is a great step in moving toward an impartial tax appeals process. MS. CALVERT concluded, "There are a number of ways the current system could be improved and we support the committee substitute as an alternative to the Tax Court bill as originally introduced. We encourage this committee, the Alaska Legislature and the Administration to work toward a resolution that truly provides an impartial appeal process in Alaska. Such changes will lead to expedited resolution of tax issues, with benefit to all parties involved. Most importantly, it sends a message of tax fairness that is critical in encouraging future investments in Alaska." Number 1527 REPRESENTATIVE DAVIES asked Ms. Calvert if she had reviewed HB 427, the Governor's bill, and asked for her comments on that approach. CO-CHAIRMAN GREEN remarked that HB 427 was not on the table. Number 1538 MS. CALVERT explained she is not in the tax organization of Marathon Oil, but would answer in a broad sense. She said Marathon had reviewed the Governor's proposal, and their general feeling is HB 341 provides a more impartial process by having the de novo review at the superior court level. Number 1631 BEVERLY WARD, ARCO Alaska, Incorporated, came before the committee and read her testimony into the record: "ARCO Alaska, Incorporated, appreciates the opportunity to present its views regarding legislation to change the procedures for hearing tax disputes and looking for ways to improve that process. This has been an area of great concern to ARCO for more than twenty years and we applaud the efforts of Representative Green and the efforts of the Knowles Administration to deal with this complex issue in a thoughtful and fair-minded manner. MS. WARD continued, "ARCO believes that the present system for tax hearings is broken. It is so broken that it is rarely used because taxpayers go to great lengths to avoid it. ARCO has used the existing formal hearing process only once in the past ten years. There is a widely held perception among taxpayers that the existing system does not provide taxpayers with the opportunity for a fair and independent hearing. MS. WARD testified, "In the past few weeks, we have looked at three different proposals for changing the tax hearing process: House Bill No. 341 introduced by Representative Green would establish a separate Tax Court; a newly adopted CS for House Bill No. 341 also presented by Representative Green would provide for tax hearings before the superior court; and House Bill No. 427 introduced by the Governor would establish an Administrative Law Court outside of the Department of Revenue. MS. WARD said, "While these bills each take different approaches, each of these proposals would be much fairer than the present system and we urge the legislature to give each of these bills a full hearing. MS. WARD said, "In judging these three proposals and any other proposals which might emerge, ARCO urges the legislature to critically examine the proposals against nine criteria which ARCO believes should be present in any tax hearing process: -The hearing should be outside the control of the Department of Revenue. -The hearing officer or judge should serve for a term of years rather than be subject to termination at will. -The hearing officer or judge should be specifically required to have experience in the area of tax law. -The hearing should be a de novo proceeding where the hearing officer or judge has original jurisdiction and hears evidence without regard to the proceedings below. -The burden of proof on questions of fact should be preponderance of the evidence. -The standard of review of questions of law should be substitution of judgment. -Where authority has been legally vested in the Commissioner of Revenue to interpret a revenue provision, a reasonable basis standard should apply. -A taxpayer should have the opportunity to conduct legitimate discovery but neither the taxpayer nor the Department of Revenue should be permitted to abuse the discovery process. -The hearing process structure should, to the extent possible, take into account the uniqueness of Alaska's situation of very few taxpayers and tax appeals. The hearing system should be tailored to Alaska's needs and be as efficient as possible. MS. WARD continued, "ARCO urges this committee to apply these criteria to all three proposals as wells as to the existing law. We believe a proposal might emerge which meets all of these criteria and is acceptable to the stakeholders - the legislature, the Administration, the court system and the Alaska taxpayers. MS. WARD concluded, "In closing, ARCO would like to stress two points. The first is that from our perspective this is a very important issue which has long term implications for how taxpayers will view the business climate in the state and the fairness of the playing field. The second is that this is a major opportunity where all of the stakeholders are making a bona fide attempt to establish a fair tax hearing system and every bill that has been proposed is a significant improvement over the existing system. "Once again, we applaud your efforts and the efforts of the Administration. We stand ready to do whatever we can to facilitate the enactment of fair tax hearing legislation." Number 1853 REPRESENTATIVE SCOTT OGAN asked Ms. Ward to explain the current burden of proof with the Department of Revenue. MS. WARD said her understanding of preponderance of the evidence means the majority of the evidence has to support the argument. Number 1915 DEBORAH VOGT, Deputy Commissioner, Department of Revenue, said she did not plan to give an overview of the Governor's bill (HB 427), except to talk about general concepts. She said she appreciated industry representatives comments on the principles they wanted to look at rather than line-by-line problems or the benefits of any particular approach. MS. VOGT feels the current system is not broken. She said the current system is fair and can be used by taxpayers to resolve their differences in a fair way. She said she believes the system is perceived to be broken and that perception is not going to go away. Ms. Vogt said she would present information that she had also provided at the October 24, 1995 hearing on HB 341. MS. VOGT continued, the Department of Revenue decided to look into the perception that its system is unfair. This first thing we did was a survey of all fifty of the other states. The DOR talked to each of the tax departments in each of the states and concluded that its system of having the department review a taxpayers dissatisfaction with his assessment in front of the department, and then have it go on appeal to the superior court on a substantial evidence test, is in the distinct minority. MS. VOGT said the Department of Revenue then contracted with New York consultant Paul Frankel, Morrison & Foerster, who has consulted with a number of other states on tax resolution and tax dispute procedures. Mr. Frankel reviewed Alaska's laws and regulations and proposed regulations and recommended the Department of Revenue move toward a system of independence. His criteria was: (1) the independence of the person who does the de novo review or the trial; (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 individuals performing the trial have tax expertise and be tax professionals. Number 2071 MS. VOGT referred to the flow sheet entitled, House Resources Committee comparison of Alaska's Present Tax Audit and Appeals Process and the Resources committee substitute HB 341 version "K." She said, in our current system, a taxpayer files a return and with most taxpayers their return is reviewed and accepted. With the oil and gas taxpayers, we have a policy that every return is audited, and the tax for the severance tax and the corporate income tax of the industry taxpayers are constantly reviewed. She said it is rare that the audit process has not resulted in some disagreement with the taxpayers initial filing. So, the tax bill is then issued. At that point, under our current system, the taxpayer has a choice of paying the bill, going to informal conference or going to formal hearing. The informal conference is an opportunity to come in and talk with the department about what the Department of Revenue may have done wrong. In a $200 million dispute, the conference is going to be a little more formal than with a fisherman over a dispute of a couple of hundred dollars. It is not a trial, or an adversarial process where two parties put on evidence in front of a judge, and the judge makes a decision on the record. MS. VOGT testified that a taxpayer can skip that process and go straight to formal hearing which is a more formal proceeding. It is an adversarial process, it is a three component system where you have a judge and two parties, and the judge is the hearing officer who is, as the taxpayers pointed out, an employee of the Department of Revenue. It is the statutory duty of the commissioner to hold the hearing himself. She said she remembered when Tom Williams was commissioner, he held at least one hearing. The hearing officer holds the hearing on behalf of the commissioner and makes a recommended decision to the commissioner. The commissioner then adopts, rejects or revises the decision or sends it back for more work; and then the hearing officer puts out the decision under the commissioner's name. That decision can be appealed by the taxpayer to the superior court. As the taxpayers have testified, the standard of review at the superior court is the substantial evidence standard. What that means is the judge looks at the record to discover whether there is any good evidence in the record that supports the hearing officer's conclusion. That is the job of the trial court, to weigh the evidence and believe the witnesses. MS. VOGT explained that the standard at the Department of the Revenue is the "preponderance of evidence standard" before the department's hearing officer. She said the difficulty the taxpayers have with that is that it is the department's hearing officer who views the facts and not an impartial party. Number 2262 MS. VOGT clarified that "de novo" means "the trial," the point at which the facts are tried. She said it was confusing to talk about the concept of appeal with the concept of de novo, but what it means is the person who weighs the evidence "de novo" does so as though no proceedings have taken place. Number 2318 MS. VOGT said the department has some problems with the way CSHB 341 is drafted and appreciates a further opportunity to work out whatever becomes of this effort. The DOR feels the committee substitute does not provide the full independence the taxpayers are looking for; (1) because it only applies to certain taxes, and (2) the taxpayers have a choice whether to go through the Department of Revenue proceedings or go to court. For a small taxpayer that may be an important decision because court proceedings will be more formal and it is going to be harder to do it "pro se," without a lawyer, and small taxpayers may feel that this has not fixed anything for them. The legislation that is before you does not provide for tax professionals to review the tax cases; you will appeal to the superior court and it is not clear whether you get a jury or not. But, you will certainly get the luck of the draw in the judge, and the judge will not have any particular background or expertise in tax matters. Many taxpayers, maybe not the ones we have heard from today, but fishermen and small corporations are very dependent upon the tax expertise within the department. Number 2401 REPRESENTATIVE ALAN AUSTERMAN stated that the taxpayers still have that ability. MS. VOGT replied yes, they could stay within the Department of Revenue and go to formal hearing, or they can go outside the Department of Revenue and go to more complex hearings and a considerably graver expense. Number 2430 MS. VOGT said another element that Mr. Frankel talked about was that the taxpayer should be entitled to have his or her trial go for paying any taxes, and this legislation requires the taxpayer pay all the undisputed taxes, which seems to make sense, but also that the taxpayer posts a bond for the disputed taxes. That is what we do when the case goes to superior court, but we have already held the trial by the time it goes to superior court. Number 2430 MS. VOGT said the current system raises an issue for the DOR that every commissioner over the years has grappled with; how to preserve judicial independence for those cases that are going to come to the commissioner's office for resolution. For example, when a matter comes to the commissioner's office and it comes to formal hearing, the commissioner must then remove himself from the details of the case on the division's side. That is not hard for a commissioner in a state with thousands and thousands of taxpayers, and no one of whom pays more than two or three percent of the state's taxes. It is very hard in a state where you have three big taxpayers, and the cases, as they are coming through the process, are important.....end tape. TAPE 96-6, SIDE B Number 000 MS. VOGT is saying the commissioner is not going to know until the taxpayer makes the choice of either going through the Department of Revenue proceedings or going to court, what route that case is on. She said that is the difficulty and the department feels if we are going to do this, let's do the whole thing, let's get the hearings out of the Department of Revenue and then the commissioner's role becomes clear for all cases. Number 033 MS. VOGT said the final principle is the department thinks whatever system is used should streamline the cases. Some cases take years and years to resolve, and part of that is because they are so big, and part of that is because the laws were not as clear as they are now, but part of it is because the procedures are not designed for streamlining the cases. Ms. Vogt informed Chairman Green that she feels his bill will make things worse. She feels court proceedings are going to be more complex, more drawn out, require more discovery and more formal rules of evidence. She said it is going to take longer, and it is going to be longer before the public knows how much money it is entitled to from the taxpayers. Number 071 MS. VOGT said the Governor's bill, HB 427, provides the formal hearing function for taxes to be moved to the Department of Administration, outside the purview of the Department of Revenue. An independent "administrative law judge (ALJ)," the same function as a hearing officer, would be established in the Department of Administration. The chief administrative law judge, if more than one, would be hired for a term of years and be dismissable only for cause. The "administrative law judge" must have a tax background. The standard of review is clearly articulated in the Governor's legislation and fits in with the articulated requirements that the industry testified to today. The "administrative law judge" would review factual questions on a preponderance of evidence unless some other standard is required by law. There are a couple of instances where either, for instance, the Supreme Court of the United States has repeatedly said, in certain income tax matters or by statute, a different standard is set. CSHB 341 changes the hearing procedure for determinations of what the economic limit is. The statute says the taxpayers has to show by clear and convincing evidence. MS. VOGT said questions of law should be resolved on the substitution of judgment standard. In questions that are committed to the agency's discretion, or questions of basic policy, should be reviewed and should be deferred to, if there is a reasonable basis for those. The department felt very strongly that we did not want an outside hearing officer or judge to be substituting his or her judgment for that of the commissioner on those things that are really committed to the Department of Revenue's judgement. Number 219 MS. VOGT referred to Dan Seckers testimony where he recommended that standard for those questions committed by statute to agency discretion. The department feels that goes too far. There are issues that the courts are going to find are really founded in the expertise of the department or that are really basic policy issues. The legislature is not going to be able to think of every one of them and articulate them in statute. She felt that everyone agreed that the Department of Revenue's policy determinations ought to be left to the department, but she feels there is still some disagreement between the department and the taxpayers. Number 246 MS. VOGT said the Governor's bill resolves the dual role of the commissioner problem because it takes all of the tax hearings out of the DOR. It has a lot provisions in it to streamline the cases. It has provisions dealing with discovery and provisions dealing with evidence. Number 291 MS VOGT concluded, saying she is pleased that the committee has taken on this issue. It is an issue that ought to be resolved and she hopes the Administration and the committee can come to a resolution. CO-CHAIRMAN GREEN noted the arrival of Representative Nicholia. Number 321 REPRESENTATIVE OGAN said if the vast majority of tax situations end up in dispute; a better approach is to write tax laws that are less ambiguous, resulting in fewer disputes. MS. VOGT said that was a good point. The department has had a series of regulation review, writing and projects for the oil and gas taxes to narrow the grounds for dispute. She said there are always going to be disputes no matter how clear the law. She said on the corporate income tax side, issues like, "Is a certain foreign tax, an income tax or not?" If it is an income tax, then it is not a deduction against our income tax, if it is an excise tax then it is. She said we can go to hearing on some of these issues and get precedential hearing decisions, but the committee has heard testimony from some taxpayers that they are reluctant to use that system. Most of the tax and royalty matters have been settled in the last six or eight years. She said what she sees from a tax administrator's perspective is that the department does not have answers to some of the recurring kind of questions. A hearing process that every one believes is fair can help the department move forward in that direction. Number 445 REPRESENTATIVE LONG said HB 341 was geared toward certain taxes, he asked Ms. Vogt to clarify what taxes are covered in this bill. Number 461 MS. VOGT replied, CSHB 341 addresses the major taxes, the oil severance tax and the corporate income tax, those are the big ones. The procedures it articulates apply to those taxes, the mining license tax which is not a big tax, it applies to fisheries business tax, but it does not apply to the landing tax and those taxes are the left and right hands of each other for onshore processing and offshore processing. It applies to the oil severance tax, but not the conservation tax and the conservation tax is a function of the same production that the severance tax is. She would like to see legislation for this effort that applies to all tax and not just specific ones. Number 521 REPRESENTATIVE AUSTERMAN asked the Chair why CSHB 341 did not contain all taxes. CO-CHAIRMAN GREEN said the original legislation started out as a tax court, specifically, for a majority of the oil taxes. Through the committee substitute, the bill has taken a somewhat different approach. He said he understood the department's desire that if the tax appeal process is adjusted, then it should be for all taxes. Albeit, the number would be greater, but the amount would be rather small compared to ones that this originally addressed. He said, some of the undisputed taxes were left out. Number 570 REPRESENTATIVE AUSTERMAN asked if there would there be a problem with including all of taxes in the new committee substitute. CO-CHAIRMAN GREEN said he would have to review that issue and did not see a problem. REPRESENTATIVE JOHN DAVIES said the fact of whether the oil and gas conservation tax and whether certain fisheries taxes should be included is more of a resource issue than a judicial issue. He suggested the Resources Committee make those recommendation as it forwards the packet to the House Judiciary Committee. Number 608 CO-CHAIRMAN GREEN said he certainly had no objection. He said he would also forward Ms. Vogt's testimony. Number 618 CO-CHAIRMAN BILL WILLIAMS asked Ms. Vogt to provide information on tax appeal ratios concerning fishermen versus the oil industry. MS. VOGT said the majority of the DOR's appeals involve the corporate income tax. She said there are not very many cases. Over the last four or five years, approximately 15-20 cases coming out of the Income and Excise Division have gone to formal hearing. The Income and Excise Division is responsible for corporate income taxes, all the fisheries taxes, everything but the oil severance and the former separate accounting. The department has had approximately four appeals from the oil and gas side which involved the severance tax and the former separate accounting. She said almost all of the 20 cases involved the corporate income tax. Number 755 CO-CHAIRMAN WILLIAMS asked a question about smaller taxpayers being reluctant to use departmental expertise. MS. VOGT responded that the reluctance she is aware of comes from the large taxpayers. She said smaller taxpayers often rely on the tax expertise of the people in the DOR. Most of these matters are going to be resolved in informal conference. That process would not change under either Representative Green's bill or the Governor's bill except that you would no longer have the choice of skipping it. Number 880 MS. VOGT elaborated on the informal conference and said one of the differences between Representative Green's bill and the Governor's bill is that HB 341 requires the taxpayers to make the choice of staying with the department, which they perceive as unfair, or going to court where they have to get a lawyer and it is going to become more formal. Number 945 CO-CHAIRMAN WILLIAMS said the committee's goal is to develop this process so that it is friendly to everyone and not perceived as the taxpayers have testified. He asked how the committee can achieve that when the Administration is saying that CSHB 341 will not be able to get there. Number 994 MR. WILLIAMS said small taxpayers may feel there is a problem of lack of impartiality, but it is not merely a perception to how big taxpayers, like BP, feel. Many small taxpayers like to cover their own records and not be represented with an attorney. Those types of taxpayers do not see the fine points, like myself, in terms of burden of proof and preponderance of the evidence and trial de novo. What they do know is their juror, their judge is an employee of the commissioner who is also responsible for prosecuting the audit (inaudible). That is what gives rise to the sense, for those people as well, that it is tough to get a fair shake. MR. WILLIAMS related that he was general counsel to Cook Inlet Region, Incorporated (CIRI), prior to working for BP. While Cook Inlet Region is small compared to the oil companies, we did get a tax assessment because Cook Inlet Region has some royalty income from leases in the Kenai Peninsula. That income was subject to sharing under Section 7 (i) of the Alaska Native Claims Settlement Act. So, not only on behalf of its shareholders but on behalf of all the regions and village corporations who will share under Section 7(i) and 70 percent of that revenue, the CIRI wanted to contest the assessment issued against it. It ended up being settled, in part, because there is a problem in the formal hearings currently that become very cumbersome and expensive. Number 1159 MR. WILLIAMS discussed Ms. Vogt's point about the Governor's bill having the flexibility for the administrative law judge to relax the procedures where you have a "mom and pop" corporate entity coming in contesting an assessment or disallowing an interest deduction when they find a receipt and come in show it. He said that is the sort of thing that is good, there is flexibility in the Governor's bill to deal with the small taxpayers. There has been a problem in the past about merging these roles. He said, "When I was commissioner, people who were not involved in the hearing and did not hear the witnesses, nevertheless, were editing and revising the hearing officer's findings and conclusions of law." That is legally permissible, but it is not something that creates a good atmosphere of trust between the taxpayers and the department. That is the real problem that everyone is agreeing on. Set aside the arguments about the legal merits of things, that is irrelevant, we are looking at the future together and trying to put our differences behind us and look over what our interests are in common. This perceived problem of impartiality is an issue that is an obstacle toward Alaska's competitiveness. The legislature and the Administration are both concerned about this and so are we. Number 1239 MR. WILLIAMS said we can debate the relative merits of all three proposed bills, but compared to the present system, all three of them are so far ahead of where we are now that it would be almost preposterous that disagreement about which one is the very, very best, would keep something from happening. That is what our concern is, we want to work out an agreement with principles and then put those principles down in words, and move forward. He said BP is prepared to work as hard as they have to, to try to craft something that is going to reflect one of these measures or perhaps a combination that represents a significant improvement from where we are. Number 1305 REPRESENTATIVE PETE KOTT followed up on Representative Ogan's question regarding the vast majority of tax situations ending up in court. He wanted to know why the legislature had not made inroads in solving this problem. Number 1356 MS. VOGT responded there are going to be tax disputes as long as we have taxes, and we are going to have to have a system for resolving them. She reiterated that the DOR had tried very hard over the past couple of years to work on the regulations so that the magnitude of the disputes is as narrow as possible. What we are striving to do is to make the disputes with the industry of the $20 million magnitude rather than the $200.00 or the $2 billion magnitude. She related that the DOR had made progress in resolving old disputes and most of them have been settled. She said the department's tax program is getting close to current and will be current in a couple of years. She mentioned two very old issues remaining and said the department simply needs a way to resolve those remaining issues. Number 1521 REPRESENTATIVE KOTT confirmed with Ms. Vogt that she is suggesting the state has lesser of a problem today than three years ago. MS. VOGT replied, absolutely. Number 1530 REPRESENTATIVE AUSTERMAN wanted clarification that the informal hearing process in the Governor's bill stays the same, and then, if the process goes to formal hearing, it goes before a hearing officer in the Department of Administration. MS. VOGT said that was correct with one exception. The exception would be that the informal conference would no longer be a matter of choice, it would be mandatory to go through the informal conference proceeding within the Department of Revenue. Number 1685 REPRESENTATIVE AUSTERMAN confirmed that after the formal hearing at the Department of Administration, the appeal would go to superior court, and, if appealed again, it goes to trial de novo. MS. VOGT said the appeal at the superior court would be on the record and would end an appeal of an administrative decision like it is now. Number 1724 REPRESENTATIVE KOTT stated that when these cases end up in superior court, the Department of Revenue is represented by counsel. He asked if counsel is retained on contract or is the Department of Law responsible for providing counsel. Number 1776 MS. VOGT said the Department of Law makes that decision. In the past, they have used outside attorneys for some of the bigger cases. She understands the department is moving toward the ability to handle more and more of these issues in house. Number 1800 REPRESENTATIVE KOTT wanted clarification from the Department of Law about court rules concerning the "prevailing party." He wanted to know if there is a court rule that prevents a taxpayer from arbitrarily or capriciously filing in superior court. Is there a prevailing party court rule that would be applied? Number 1890 MS. VOGT felt Representative Kott was referring to the attorney fees provisions Alaska has, that is different from any other state, where the prevailing party is entitled to some portion of its expenses in litigating. She said the committee substitute has a de novo trial in superior court and the prevailing party is entitled to attorney fees under Rule 82. She clarified that no fees are available for the Administrative proceeding in the Department of Revenue nor are they in the Governor's bill at the Department of Administration. Number 1967 REPRESENTATIVE AUSTERMAN said under the Governor's bill, the formal appeals process goes to the Department of Administration. He asked Chairman Green his feeling on amending the proposed committee substitute for HB 341 to include that. CO-CHAIRMAN GREEN clarified, "of going directly to superior court after the informal hearing?" REPRESENTATIVE AUSTERMAN said the industry might want to answer that question and suggested the industry may not want to go to court quite so fast if the Department of Administration is the formal appeal officer. CO-CHAIRMAN GREEN deferred to Ms. Vogt. He asked, "Are we at arms length or are we the same with a different title." NUMBER 2085 MS. VOGT said she the question might be better addressed by the industry. She said many states that have "independent review of tax appeals" have that review in an administrative agency outside of the tax department. She said the DOR's consultant, Mr, Frankel, has been a proponent of exactly that model. MS. VOGT responded to the comment about cabinet members sitting around talking about a particular case, and said the obstacle there is the commissioner of the Department of Revenue would then be a litigant in front of the commissioner of the Department of Administration and he would not be able to talk about that case. Number 2197 MS. VOGT clarified in the Governor's bill that the commissioner of Administration does not adopt a proposed hearing decision made by the administrative law judge within the department. The administrative law judge simply adopts his own decision and it is not subject to approval by a cabinet member. The administrative law judge would be appointed for a term and dismissable only for cause. His or her decision then would be appealed straight to superior court. She believes the Governor's bill sets up the sort of true independence the parties are looking for. Number 2264 REPRESENTATIVE AUSTERMAN recommended hearing from the oil industry whether having the informal hearing process incorporated into the Department of Administration would solve some of their problems. He said if the committee was going to amend HB 341, that is one of the areas he will consider. Number 2370 CO-CHAIRMAN GREEN said Ms. Vogt has been invited to work with the House Judiciary Committee. MS. VOGT said if the Department of Administration were substituted for the Department of Revenue in the committee substitute, the DOR would object to there being a de novo hearing at the Department of Administration and then, again, at court.....end Tape One. TAPE 96-7, SIDE A Number 000 MS. VOGT explained in drafting the Governor's bill, the Department of Law felt it unusual to appoint an administrative employee for a term of years. The Department of Revenue did not want to stray too far from the normal personnel procedures, and felt that by providing the independence protection to the chief administrative law judge, it would accomplish the perception of true independence that we are looking for here. Number 139 REPRESENTATIVE DAVIES conjectured that the chief administrative law judge has the protection, but if his deputy is actually the hearing officer in the case. Is it the deputy's decision that is appealed to superior court or is his position adopted by the chief and that is appealed to the superior court. MS. VOGT replied that HB 427 has a provision that states that the decisions have a precedential value and the administrative law judges are expected to circulate decisions among themselves and come to an agreement. Number 220 ROBERT BRIGGS, Assistant Attorney of Law, Oil, Gas and Mining Section, Department of Law addressed the question of who makes the final decision on a tax case in the Governor's bill. The way it is drafted, the final decision would be made by the hearing officer who heard the evidence. There is a provision in the bill for opinions on questions of law to be circulated among the chief administrative law judge and the other administrative law judges who might be employed. The purpose for that provision is to provide some consistency, sort of a "collegial atmosphere" for administrative law judges to look over each others shoulders and read their legal opinions and say, "I do not think you have this right" and give a chance for that kind of comparison for legal opinion. As to questions of fact, those under the Governor's bill would be decided by the person who hears the evidence. Number 306 REPRESENTATIVE DAVIES recommended that perhaps all administrative law judges should have the protection of term of office so that their perceptions of fact and their findings would have that mantle of independence that we are trying to achieve. CO-CHAIRMAN GREEN stated that the committee has heard Ms. Vogt's opinion about a tax court. He then asked her if she would still be opposed to a tax court review if the issue included the capability of a tax "wise" judge to hear the case. Number 439 MS. VOGT reiterated two reasons why the Department of Revenue was not happy with the idea of a tax court. She said the first problem in the current draft is the lack of tax expertise, and felt the Chairman was postulating that if that issue was solved, how would the DOR feel. She said the other major element is the expeditious treatment of tax matters. She talked about developing an informal system for the small taxpayer; a system that would not be subject to the formal rules of court; and formal evidence rules to all the panoply of discovery. She said the DOR has spent a fair amount of time developing provisions in the Governor's bill that would give the hearing officer some "teeth" to get a handle on the magnitude of the case and keep it to a reasonable size. She feels the size of cases will "blossom" rather than become streamlined under the committee substitute. Number 537 MR. WILLIAMS asked to comment on an earlier issue and addressed the subject of, "moving toward clearer rules of the game to reduce tax disputes." He said he agreed with Ms. Vogt that there has been a lot of progress made and continues to be worked on now. It is an ongoing process to clarify the rules. He said, part of the problem in the past, and one the lessons to be learned from it is that when mistakes get absolutely colossal, policy making may become paralyzed or becomes driven by considerations that parties would rather not see driving those decisions. The point is, by making the playing field on the tax appeals more level, at the same time that tax rules of the game are made clearer, we take the pressure off the system and have a fair and equitable system of tax administration which, from this side of the Table, Alaska has lacked. We are very encouraged by the progress that has been made and are encouraged to believe that there will be a lot more progress to be made with the Administration on clarifying the tax rules. That is a complimentary effort not an exclusionary effort to the one that you are dealing with here in the subject of this legislation. The two go hand-in-hand and between the two of them we will have a better system. CO-CHAIRMAN GREEN asked Ms. Vogt if the administrative law judge concept in the Governor's bill could be modified by removing it from the Department of Administration and creating an independent administrative law judge. Number 692 MS. VOGT said she was unprepared to address that issue at present, but she expressed concern with the expense of setting up an entity separate from existing government. Number 717 CO-CHAIRMAN GREEN said if that were contracted out instead of having a departmental employee, would the expense be a trade off. MS. VOGT said she cannot imagine that a contract attorney would be less expensive than a state employee. Number 752 CO-CHAIRMAN GREEN asked the view of the Department of Revenue regarding the right to the discovery procedure if there is a quasi "de novo" in the Department of Administration. Number 796 MS. VOGT replied the subject came up with Paul Frankel who recommended eliminating the discovery procedure. She explained that Mr. Frankel's point was that the Department of Revenue has the subpoena power and can get all of the taxpayers records. The taxpayer has access to his own file in the DOR. MS. VOGT said that she and the commissioner were intrigued by that idea and floated it out for discussion amongst the group working on the Governor's bill. She said the DOR had some resistance from both sides, from the attorneys in the Department of Law and from the taxpayers we worked with. She remarked that Mr. Frankel has probably not seen tax cases in which one taxpayer pays almost half the taxes in the state. Number 881 MS. Vogt continued, the DOR worked very hard to find some sort of compromise that would limit a "blank check" on discovery without compromising appropriate due process. Number 933 CO-CHAIRMAN GREEN said if an applicant protested an administrative law judge decision in the Governor's version, and the ALJ refused to provide the applicant with a particular request; and the applicant appealed to superior court, would the entire record including the denied request be transferred to superior court. MS. VOGT said yes, it would be like a trial judge in superior court making a ruling that the superior court or the next court up would be empowered to find the ruling was in error and the evidence should have been admitted. Number 973 REPRESENTATIVE DAVIES asked if the intent of the Chair was to move CSHB 341 from committee. He stated he found the discussion very useful and suggested that the committee hold the bill and continue the discussion. Representative Davies said if it is the intent of the committee to move the bill, he would like to include two items. Number 1010 REPRESENTATIVE DAVIES asked that the committee substitute for HB 341 include the understanding that the Chair would request the Speaker of the House to refer the Governor's bill to the House Judiciary Committee. CO-CHAIRMAN GREEN responded that would be a consideration, and whether or not that is actually done, the context of the bill would be reviewed in the House Judiciary Committee. Number 1056 REPRESENTATIVE DAVIES said testimony from the taxpayers indicates they think there is a substantial agreement in principle among all the parties here about the kinds of concerns that need to be resolved. He recalled a specific suggestion that the subcommittee consider these principles to find the commonality, and then proceed to a new committee substitute to incorporate all of these things. CO-CHAIRMAN GREEN said that certainly is his feeling as well that there should be a strong recommendation to the Judiciary Committee. Number 1111 REPRESENTATIVE LONG said that was also one of his concerns. He said he was unsure of the procedure but that he intended to make a motion to attach HB 427 to HB 341. CO-CHAIRMAN GREEN said the committee can send a recommendation, but the question of whether we attach HB 427, or not, is moot because the context would be part of the recommendation for review. He said he felt he could speak for the chairman of the Judiciary Committee that that would be his attitude. Number 1177 REPRESENTATIVE OGAN commented that there is a problem in many state agencies where the same organization that creates the regulations, enforces and adjudicates the regulations. He feels HB 341 is a step in the right direction. Number 1208 CO-CHAIRMAN WILLIAMS moved that CSHB 341 Resources move from the House Resources Committee with individual recommendation and the attached fiscal note. CO-CHAIRMAN WILLIAMS motion also included the language "the questions brought up by the Chair and other Representatives be attached." There being no objection, it was so ordered. Number 1237 CO-CHAIRMAN GREEN announced the committee will hear HB 325, Heavy Oil, on Friday, January 26th. Number 1281 ADJOURNMENT The meeting was adjourned at 9:58 a.m.