HOUSE STATE AFFAIRS STANDING COMMITTEE May 7, 1994 2:00 p.m. MEMBERS PRESENT Representative Al Vezey, Chairman Representative Pete Kott, Vice Chairman Representative Bettye Davis Representative Gary Davis Representative Harley Olberg Representative Jerry Sanders Representative Fran Ulmer MEMBERS ABSENT None COMMITTEE CALENDAR SB 377: "An Act relating to state agency fiscal procedures, including procedure related to the assessment and collection of certain taxes; and providing for an effective date." HEARD AND HELD WITNESS REGISTER DARREL REXWINKEL, Commissioner Department of Revenue P.O. Box 110400 Juneau, Alaska 99811-0400 Phone: 465-2300 POSITION STATEMENT: Testified on SB 377 JOHN PILKINTON, Director Oil and Gas Audit Division Department of Revenue 550 West 7th Avenue, Suite 570 Anchorage, Alaska 99501-3557 Phone: 276-1363 POSITION STATEMENT: Testified on SB 377 BRUCE BOTELHO, Attorney General Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 Phone: 465-3600 POSITION STATEMENT: Testified on SB 377 PAUL WESSELLS, Vice Chairman Alaska Oil and Gas Association Tax Committee 121 Fireweed Lane Anchorage, Alaska 99501 Phone: None Given POSITION STATEMENT: Testified on SB 377 PREVIOUS ACTION BILL: SB 377 SHORT TITLE: STATE AGENCY FISCAL PROCEDURES SPONSOR(S): FINANCE JRN-DATE JRN-PG ACTION 04/13/94 3633 (S) READ THE FIRST TIME/REFERRAL(S) 04/13/94 3633 (S) FINANCE 04/13/94 3650 (S) FIN WAIVED UNIFORM RULE 23 04/14/94 (S) FIN AT 09:00 AM SENATE FIN 518 04/20/94 (S) RLS AT 06:45 PM FAHRENKAMP ROOM 203 04/21/94 (S) FIN AT 10:00 AM SENATE FIN 518 04/21/94 (S) RLS AT 02:15 PM FAHRENKAMP ROOM 203 04/21/94 3839 (S) FIN RPT CS 6DP 1DNP SAME TITLE 04/21/94 3839 (S) FN TO SB & CS PUBLISHED(ADM) 04/21/94 3839 (S) ZERO FN TO SB & CS PUBLISHED (REV) 04/22/94 3870 (S) RLS RPT 3CAL 1NR 4/22/94 04/22/94 3876 (S) READ THE SECOND TIME 04/22/94 3877 (S) FIN CS ADOPTED Y12 N8 04/22/94 3877 (S) AM NO 1 MOVED BY KERTTULA 04/22/94 3882 (S) QUESTION: AM NO 1 GERMANE? 04/22/94 3883 (S) AM NO 1 GERMANE Y17 N3 04/22/94 3883 (S) AM NO 1 ADOPTED Y14 N6 04/22/94 3883 (S) AM NO 2 MOVED BY DONLEY 04/22/94 3884 (S) AM NO 2 FAILED Y9 N11 04/22/94 3884 (S) ADVANCED TO THIRD READING UNAN CONSENT 04/22/94 3884 (S) READ THE THIRD TIME CSSB 377(FIN) AM 04/22/94 3884 (S) PASSED Y16 N4 04/22/94 3885 (S) EFFECTIVE DATE PASSED Y17 N3 04/22/94 3885 (S) Pearce NOTICE OF RECONSIDERATION 04/22/94 3885 (S) TAKE UP RECON ON SAME DAY WITHDRAWN 04/22/94 3937 (S) RECON TAKEN UP SAME DAY Y18 N2 04/22/94 3937 (S) PASSED ON RECONSIDERATION Y16 N4 04/22/94 3938 (S) EFFECTIVE DATE SAME AS PASSAGE 04/22/94 3941 (S) TRANSMITTED TO (H) 04/27/94 3746 (H) READ THE FIRST TIME/REFERRAL(S) 04/27/94 3747 (H) STA, O&G, JUDICIARY, FINANCE 05/07/94 (H) STA AT 08:00 PM CAPITOL 102 ACTION NARRATIVE TAPE 94-55, SIDE A Number 000 SB 377 - STATE AGENCY FISCAL PROCEDURES CHAIRMAN AL VEZEY called the House State Affairs Committee meeting to order at 2:32 p.m. He announced the committee would be meeting on SB 377, "An Act relating to the limitations period for certain state taxes, and for collection of assessment of taxes due the state; relating to valuation of oil and gas under AS 43.55; adding certain definitions applicable to oil and gas production taxes; and providing for an effective date." He noted that there was HCSSB 377(Fin) as amended. Chairman Vezey said the primary subject he would like to take testimony on is the retroactive portions of the bill. He indicated he believes that is the most controversial aspect that is before the committee. Number 039 The first person to testify was DARREL REXWINKEL, COMMISSIONER, ALASKA DEPARTMENT OF REVENUE. Commissioner Rexwinkel introduced John Pilkinton, Director, Division of Oil and Gas Audit, Department of Revenue. Commissioner Rexwinkel said the department has presented extensive testimony at prior meetings on SB 377 which part of SB 185. He noted that the attorney general has provided a comprehensive document answering many questions relating to the statute of limitations provision of the bill which was in a letter dated May 2, 1994. Commissioner Rexwinkel said the department wants the ability to determine the amount of tax owed and the ability to also collect that tax. Without SB 377, the department cannot even determine how much tax is owed. It is not a dispute of how much tax should be paid nor is it a dispute about whether the Department of Revenue's assessments reflect correct or incorrect application of statute. He said they are not changing or clarifying AS 43.55 which is a severance tax statute, nor are they changing or even talking about AS 43.21 which is separate accounting. Commissioner Rexwinkel said he is not talking about AS 43.20 which is the corporate income tax. He referred to AS 43.20 and said the federal IRS laws were basically adopted. COMMISSIONER REXWINKEL said SB 377 is intended to clarify the statutes. Department of Revenue is not changing long held positions. One statute that is specifically referenced is the collection statute. The taxpayer doesn't have to pay the tax until the final determination of the amount of tax is made. He said the department believes that they should have six years from that date and not the date of the initial assessment. It could take years to determine the final assessment and the taxpayer has many options during that period of time. COMMISSIONER REXWINKEL referred to the audit statute. There is currently a three year statute and sometimes the taxpayer does give a waiver on that three year statute. He said that some taxpayers like to say that if the auditors don't discover or raise an issue within three years from the date of filing, that the department loses. There would be no opportunity to raise that issue again or to even discover the issue. Commissioner Rexwinkel said the department believes that if they issue an assessment notice in three years, they have put the taxpayers on notice that the department disputes their tax return. From that point until the final assessment is determined, the department believes that the tax should be able to go up or down depending on the additional information that is discovered or determined. He noted that it is consistent with the 1984 Attorney General's opinion and some of the federal tax law. Commissioner Rexwinkel said basically the taxpayer in this case wants a one way street. They want to say that the tax can only go down and the department believes that should not be the case. It is not right for the state of Alaska. He said they can have it that way as the taxpayer only has to pay the assessment when the assessment notice is issued. That doesn't mean that they never have a right to get any of their money back if they believe that the amount was over- assessed. They can file a claim for refund, but once they pay the tax, that bars the state from coming in and claiming additional assessments. COMMISSIONER REXWINKEL said the one way street is not right especially when they are part of the problem. He said John Pilkinton can give detail about some of the problems encountered during the audit process. Commissioner Rexwinkel referred to the audit process and said they go in, do an audit, and there is certain degrees of cooperation that is received from the taxpayer. Sometimes the department doesn't have all the information that is actually needed in order to make a proper assessment. Once the department issues an assessment, that opens up some additional lines of communication during the informal conference period. That is when the amount of the assessment should be able to be increased or decreased as the department determines the proper amount of tax. That is the question at hand, "Should we have the ability to make a proper determination of the amount of tax and then should we have the right from that point to collect it?" Commissioner Rexwinkel said the department urges passage of SB 377. Number 144 JOHN PILKINTON, DIRECTOR, OIL AND GAS AUDIT DIVISION, DEPARTMENT OF REVENUE, referred to the proposed committee substitute and said there is one provision that provides for an absolute five year maximum on any audit assessments. At this point, the department thinks that is reasonable. The companies have made strides in learning how to handle the production from the North Slope and have learned how to account for it. He said the provision that has been put in the bill is a compromise and is probably adequate. It does cover an issue that the department and companies have had a problem with in getting in and doing audits. MR. PILKINTON said one thing that has happened in the past and continues to happen is the department couldn't even get in to start an audit for eighteen to twenty-four months because the companies weren't ready for the department, as they were dealing with other taxing authorities such as the IRS or other states. The time was restricted before an audit could even be started. The department sends audit requests to companies and it may take them a long time to get back to the department, the requests may not be complete. The department has to go back for further clarifications. Sometimes that has been used against the department. MR. PILKINTON referred to the audit process and said it is an involved process. You're dealing with large multi- national corporations. He said in recent years there have been very few amended assessments. Most of the problems relate to early years. During those early years, there were many things going on in the world. There were windfall profits taxes, Iranian and Iraq problems, etc. He referred to the process the department follows and said from the audit standpoint, they then move into the appeals part of the process. MR. PILKINTON explained the taxpayer has several choices in appeals. They can accept the audit as presented to them, they cannot accept it and then they have two routes to go. One is an informal process which most of the companies have opted for. There is a series of negotiations to arrive at the correct tax amount. The second is that they can go to a formal process which is much more of a court type process. One of the complaints that has been voiced is that the department has taken too long to assess the taxes through the informal process. Mr. Pilkinton explained there is a regulation on the books, 15 AAC 05.050, that provides that if at any time the taxpayer isn't happy, they can forget the formal hearing. They can go to the Commissioner and say, "I'm not satisfied with this process, I want to move to formal hearing." He explained that nobody has opted to do that. If the companies think that the department is taking too long in the informal process, they should tell the Commissioner that they want to move on to formal phases. MR. PILKINTON referred to information he had given the committee "Oil and Gas Division Historical Information," and said the last chart is statistical information that is by the calendar year of the taxes, which shows the number of taxpayers and the tax dollars collected. He referred to the number of audits issued in 1978 and said there were thirty- five audits and there were nineteen amendments. Mr. Pilkinton said there is still one case in court where there are two taxpayers from 1978 that still have open tax periods. He noted that thirty-two cases are closed. MR. PILKINTON said the final observation about the audit process and in talking about amendments, 1990 to 1992 the companies filed 11,257 tax returns. That is for eighteen or nineteen producers, twenty-eight oil fields in a thirty-six month period. They filed 3,709 amended tax returns. Thirty-three percent of the tax returns they filed, they had to go back and amend. Mr. Pilkinton said from 1993 to date, they may come back with some more. They filed 3,993 returns. They amended 2,737 or sixty-nine percent. Mr. Pilkinton said there have been cases where the department does an audit and the companies are still filing amended returns. The process is not a simple process for the businesses and the department. Mr. Pilkinton explained that they have been working on a regulation process to simplify many things and it should be forthcoming soon. He urged the passage of the committee substitute. Number 257 COMMISSIONER REXWINKEL said there were many things going on. Oil started flowing down the taps in 1977. At about that time, the department changed the production tax requirements. In 1978, a separate accounting tax was brought on. At the end of 1981, the separate accounting tax was discontinued because there were some concerns over its constitutionality. He said he believes around 1986, the U.S. Supreme Court declined to hear that case, basically upholding the constitutionality of the tax. Commissioner Rexwinkel referred to 1982 and explained they once again changed the production tax statutes to try to make it revenue neutral with respect to what was on the books before with separate accounting. All that time, they were doing regulations to implement tax requirements and were trying to keep up with it. The department started in 1977 with one auditor and have built up from there. Some of the years it has been very difficult to maintain that audit staff in light of budgetary reductions. He stated that the prices were fairly stable in 1978, and then we hit the Iranian revolution in 1979. Oil prices skyrocketed. There were price controls which lead to a significant amount of oil being swapped from 105 different crude oils in order to obtain basically value in excess of the ceiling prices. Commissioner Rexwinkel said tracking those barrels of oil is very difficult. There was the Amerada-HESS royalty litigation settlement that took many years and tens of millions of dollars to go through that process. It was based on some of that information that the department gained that they were able to revise some of the assessments with respect to the production in separate accounting tax. It took a long time to get the information and it is not a simple process. The industries are dealing with the U.S. Government and many other states. A lot of times there is even a problem in making arrangements to go in to audit the companies and getting all the cooperation that is needed to get information. COMMISSIONER REXWINKEL said what the department is asking for is clarification of the statute of limitations and the ability to make a proper determination of the tax and to collect that tax. He said they are not changing the tax structure and they are not changing AS 43.55. They are not changing AS 43.21. This is not even a discussion about the corporate income tax which is AS 43.20. Number 294 CHAIRMAN VEZEY asked the commissioner to explain how they went through the process and the different trigger dates. He asked what is existing law and what is being proposed in the committee substitute. Number 299 COMMISSIONER REXWINKEL said there is two statutes that is being discussed. One is a six-year statute of limitations which says that we need to collect the tax within six years of assessment. He said the department believes that the six years begins to run from the date of final determination of tax. It seems ludicrous that it would begin from the date of initial assessment, when it takes years to make a final determination of tax. He said this is not unique to the state of Alaska, there has been many federal cases that are being heard. He explained that the time it takes to make a proper determination on the correct amount of tax is not unique to Alaska. Commissioner Rexwinkel said companies can pay the tax up front when the department issues an assessment notice. They have every right to pay that tax assessment. If they do, the department cannot any longer assert any new claims. That basically closes that tax return. The taxpayer can file a claim for refund and if they do and they can successfully argue the issues, there is always an opportunity at that point for the tax to go downward but not upward. They do have the opportunity to put the lid on the amount of the tax. COMMISSIONER REXWINKEL said there is the three year statute which means from the time the return is submitted, the department has three years in which to audit the return. He said often the taxpayer will give an extension of time. It is almost mandatory because when the department is trying to audit two or three years worth the periods at one time in order to gain a lot of efficiencies, the department is just getting started with the audit process when the statute would begin to become effective. The taxpayers do give waivers on the statute. At some point, that process is over and the department issues an assessment notice. The taxpayer then has the option to pay the tax or protest the assessment. Commissioner Rexwinkel said if they protest the assessment, they also have some further options. They can request an informal conference, which most of them do, or they can go into formal hearings. They can also go into formal hearing at any time during the informal conference process. They have that right according to regulation. COMMISSIONER REXWINKEL explained that during the informal conference period a lot of additional information is gathered. That helps to make a proper determination of the tax. Eventually there is a proper determination made. Number 340 COMMISSIONER REXWINKEL said the department has always had the position that it is six years from the date of the final determination of tax to make the collection. MR. PILKINTON noted that is once the taxpayer has exhausted all their remedies through the administrative process, as well as the courts, and not six years from the assessment date which is what the present statute can be interpreted. Number 348 CHAIRMAN VEZEY asked what the department is asking to be able to have after the taxpayer has gone through all the hearings, appeals, and court actions. MR. PILKINTON said when the amount has been established through that whole process, the department is asking for six years to get the check in hand. It should come immediately if they have used all of that period, but if the department has to institute collection action, the department has six years to do that. Number 354 CHAIRMAN VEZEY said there is a court judgment and it is his understanding that there isn't an expiration date. He asked the commissioner to explain why an additional six years is needed after it has gone to the U.S. Supreme Court and they say the tax is owed. COMMISSIONER REXWINKEL said they have six years to get the money in. CHAIRMAN VEZEY asked what happens if they don't pay in six years. COMMISSIONER REXWINKEL said they are probably bankrupt. CHAIRMAN VEZEY said it would seem to him that the department would have to go back to court to get an extension of the judgment. MR. PILKINTON suggested getting testimony from the Department of Law. CHAIRMAN VEZEY said the controversy is, we currently have a three year limitation on tax assessments. He asked when the three years starts and ends. He also asked what the proposal is in the bill and how it will change. COMMISSIONER REXWINKEL explained that the three years begins from the date the taxpayer files the returns. It is sort of like filing with the IRS. They have three years to audit your return. If you don't hear from them in three years, they don't get to audit your return anymore. CHAIRMAN VEZEY asked if the department audits all the oil companies. COMMISSIONER REXWINKEL said they do audit all the companies and when they file a monthly production tax return, the department doesn't audit every month. It would be a tremendous burden on the oil industry and the state of Alaska. The department accumulates several returns before they go in and do the audit. He said they try to accumulate two or three years worth of returns and by that time they are bumping against the statute on the oldest return that was filed. In many cases, the taxpayers will provide the department with an extension of the three year statute. At some point in time, the department needs to finish the audit and issue an assessment notice. CHAIRMAN VEZEY asked why the oil companies are willing to grant an extension. The current law is three years. They could say "no extension" and it would be all over. Chairman Vezey asked why the companies are willing to grant the extension. Number 383 MR. PILKINTON said if they are unwilling or are unable to get an extension at that point, the department has to file an assessment based on the best information that is available. In terminology, it would be called a "jeopardy assessment." He said they are not out to make the issues as broad as possible, we are trying to narrow them and that requires the information. If the department is stonewalled and doesn't get the information, then the department has to file on what they have to protect the state's interest. Normally, the companies will give an extension. CHAIRMAN VEZEY clarified that the companies and the state see it in their best interest to mutually agree to an extension. An unidentified speaker said, "correct." Number 394 REPRESENTATIVE HARLEY OLBERG asked what the definition is of "assessment." MR. PILKINTON said it is the actual letter that goes to the taxpayer demanding payment for the underpayment amount. REPRESENTATIVE OLBERG asked if there is a three year limit during which the department can do that. MR. PILKINTON said there is a three year limit in getting an assessment out unless it is extended. It could go beyond three years. CHAIRMAN VEZEY asked if the testimony is that it takes a period of time just to start an audit and the department is nowhere near the (indiscernible) completed (indiscernible) normally at the end of three years. Three years is not a normal audit cycle. MR. PILKINTON said, "That is correct." Number 405 COMMISSIONER REXWINKEL said if there is a question about the length of time it takes to conduct an audit under the provisions, we have full consideration determinations and that means looking at contracts. We have prevailing value considerations and that means, perhaps, looking at what other oils were sold for. It takes awhile to get that information as it isn't readily obtainable. There is some proprietary interest in this information. CHAIRMAN VEZEY said it is his understanding that they are referring to Section 8 of the bill. He said it is his understanding that for tax periods beginning after December 31, 1993. He read from the bill, "(indiscernible) the amount of tax imposed by this title must be assessed within five years after the return was filed." He said that is the new provision that the department is asking for. COMMISSIONER REXWINKEL said that is correct. Chairman Vezey said current statute says three years. MR. PILKINTON clarified that part of the controversy about the section is that after that three year time period is up of the issue of the initial assessment, we are in the informal process. During that time period there are adjustments to things that have been found and as a result, amended assessments have been issued. The amendment is the controversy in this issue, whether the state should have the right to raise the assessment or lower the assessment during this informal conference period. Number 443 COMMISSIONER REXWINKEL said the future provision beginning with Section 8, Items 2 says, "for periods beginning after December 31, 1993, there is a five year statute," and it goes on to say that after that five year period, the department may not increase an assessment under this subsection. He said in the future, we are going to be held to a tighter and higher standard. There will be five years in order to determine the amount of tax. Things have changed, things are a lot easier. We are now better able to track the barrels of oil, we no longer have ceiling prices, we can determine what some market prices are, we have better access to information and moving forward in the production tax area, the department can make that proper determination in a five year period of time. CHAIRMAN VEZEY asked why the state wouldn't figure out what they think is owed and multiply by ten and submit it so they don't have to worry about going above the number that is reality. Number 456 MR. PILKINTON said that is something described earlier, the jeopardy assessment. He said the department doesn't want to do that. We can come to the right number and adjust it when the new information becomes available. He said that is the right way to do it. It is not right to just throw a number out there unless you have to. Number 460 REPRESENTATIVE BETTYE DAVIS said at the present time there is the three year statute and the five year statute and the department is saying they are not able to make the assessments because the department is still gathering information. The oil companies, at this time, are allowing the department to extend the time beyond the three years. She said they are doing that already. What the department is trying to get changed is that the set three years is moved to five years from 1993 and beyond. MR. PILKINTON said that is correct. REPRESENTATIVE B. DAVIS asked what is going on from 1992 back. She asked where the retroactive part comes in and why are people saying that what the department is requesting is unreasonable because they are assessing taxes on something that has already been settled on. Number 470 MR. PILKINTON said the department issues that assessment within a timely period. But from the assessment until a settlement on a tax, the department finds out additional information. During the negotiation process, things become obvious. He said the department lowers the assessment if they find something in the taxpayer's favor. If something is found that is not in the taxpayer's favor and is in favor of the state, we think that the assessment should be increased. He said the assessment has been increased but now the companies have come forward and tried to put forward the defense that they are beyond the three years and the department is barred from making any adjustments. REPRESENTATIVE B. DAVIS said the companies have no problem with the state assessing up to the five year period, but they do have a problem with the state going back to what has already gone beyond the three years which they have automatically extended. MR. PILKINTON said the companies have problems with the state in amending those assessments. He said the bill gives the state a chance to clean up the old tax cases and gives us five years from now on to take care of any problems in the department's assessments. REPRESENTATIVE B. DAVIS asked if the bill passes what would happen. MR. PILKINTON said the department is trying to finish cases through the informal and formal process. REPRESENTATIVE B. DAVIS asked if everything would then move from an informal to a formal hearing. MR. PILKINTON said that is the process that the department is currently in. He said the taxpayer can force a formal hearing or as the division finishes their informal conference decision, then it forces it into a formal hearing process. REPRESENTATIVE B. DAVIS asked if the state is concerned now that the state will lose a certain amount of dollars because those assessments are not completed that are about to run out of time. MR. PILKINTON said because they haven't completed those assessments and/or that they haven't collected on the six- year statute. Number 503 REPRESENTATIVE B. DAVIS said when this is completed, there will be one statute and it will be a five year statute. COMMISSIONER REXWINKEL said there will be a five year audit statute and there will still be the six year collection statute. CHAIRMAN VEZEY questioned whether the six years is the current statute. COMMISSIONER REXWINKEL said that is correct. MR. PILKINTON said the part that is unclear in the current statute is the six years from the original assessment. What the department says it should be is six years from the time the taxpayer has exhausted all their rights. Number 512 REPRESENTATIVE FRAN ULMER said if you strip away all the rhetoric on both sides and in its simplest form, doesn't this bill just bless the status quo to the past and in the future impose a five year limit for assessments. COMMISSIONER REXWINKEL said that is correct. REPRESENTATIVE ULMER said when people offer the criticism that you are "changing the rules of the game" what do they mean by that. COMMISSIONER REXWINKEL said what he thinks what they are trying to say is that somehow we are increasing the taxes in changing the tax laws. He said we are not changing AS 43.55, the production tax laws. We are not changing AS 42.21, the separate accounting tax laws. We are just trying to clarify the fact that we want to be able to do what we were doing in the past and make some changes about how we are going to do business in the future. Commissioner Rexwinkel said if the bill is passed, it's not that the tax assessments are going to automatically increase by some percentage. He said the department wants the opportunity to be able to collect on the assessments that are out there. REPRESENTATIVE ULMER asked if that is dramatically different from what other states are doing. She said people are concerned that if we do this it may make Alaska noncompetitive with (indiscernible) because this is somehow different from what Texas or other states that are oil states do. MR. PILKINTON said he doesn't have some of the comparisons with him. Number 533 REPRESENTATIVE BILL HUDSON said it looks to him like there are a lot of past years where taxes were due, were filed, were assessed, and were appealed. Now we are running up against the time frame in which you can't make any changes. He asked if that is what the oil companies are asserting. MR. PILKINTON said the oil companies are asserting that the state can't collect them. REPRESENTATIVE HUDSON said the oil companies are claiming that even though they have been assessed... So there is a value, you have a value and they have got a value and time has run out and they are saying, "Sorry, you don't even get to collect our value." MR. PILKINTON said that is correct. Number 540 REPRESENTATIVE G. DAVIS said there are amounts on all of these (indiscernible) and you have apparently gotten a verbal extension approval by the taxpayers. He asked if any one company has held the department to the three years and said, "The three years is up and we do not agree to any kind of an extension." The answer to this question was indiscernible. MR. PILKINTON said in subsequent periods, the department has found additional information and has gone back and made an additional assessment based on that new information that became available. REPRESENTATIVE G. DAVIS questioned what the additional information was. He asked if the department found mistakes in their information or the department's information, or is there a new theory imposed. He asked if something was found in the IRS code that could be inserted that might raise the assessment. MR. PILKINTON said the IRS code is totally different. He said the department may be in the process of auditing company "C" and find transactions between that company and company "E" that leads the department to a new theory in discovering something that wasn't known. To protect the state's rights, the department files an amended assessment. REPRESENTATIVE G. DAVIS said Commissioner Rexwinkel had indicated that he would like to simplify the process and asked if that can be done by the state or is there federal guidelines and regulations that prohibits the state from simplifying it. COMMISSIONER REXWINKEL asked if he means how the department computes the tax for the future. He said there was another bill that was introduced in the House, HB 547, and the department did propose a draft substitute for that which would change the method of computing the value of the oil for the future. That would greatly simplify the process from now in trying to make a determination of full consideration. He said full consideration is sometimes tough to determine because there are a lot of interrelated- type companies and a lot of interrelated-type transactions between nonrelated companies and it's sometimes difficult to determine exactly what is being received in light of what may else be transacted in some other side of a transaction. He said perhaps we are auditing one company and we come across some information that gives additional information with respect to the other company and how they reported the value of the oil. Number 577 REPRESENTATIVE G. DAVIS said it is within the state's grasp without needing any federal legislation or change in federal regulations. TAPE 94-55, SIDE B Number 000 UNIDENTIFIED SPEAKER: "...so that was for how many years now?" UNIDENTIFIED SPEAKER: "Year and a half." CHAIRMAN VEZEY said, "I want to thank both of you for your testimony. I think we have picked up some very helpful information. But we do need to try to keep things moving. I would like to have the committee hear from Attorney General, Bruce Botelho." Number 009 BRUCE BOTELHO, ATTORNEY GENERAL, testified regarding SB 377. He said, "I appreciate the opportunity to speak with you. I'd like to make some brief comments before I present to you a recommended House Committee Substitute for CSSB 377." MR. BOTELHO said, "Representative Ulmer asked whether it was true that stripped of all of the rhetoric, whether this bill simply confirmed current practice and change for the future, the statute of limitations. The commissioner correctly answered that that was the case. You have focused, Mr. Chairman, on the retroactivity provision. I think that's very important. I'd submit that I think Representative Olberg's question, `What is an assessment?' really is a key element here. Fortunately, not that we're happy with the result of what the Supreme Court said, it has provided us an answer in its recent decision dealing with HB 58. In that decision the Supreme Court said that we need to know when the administrative trial begins; what triggers it? To know where the money goes. "And the Supreme Court said the answer is that an assessment is to the administrative trial, like a complaint is in a civil trial in court. There's a very important element that the court, making that analogy -- let me explain why, because it also explains what the historic position of the Department of Revenue and the Department of Law has been. There are also statutes of limitations, as you know, in the whole arena of civil litigation, and, for that matter, in criminal litigation as well. Some are two years, some are three, some are six, some are ten. And there are some cases, capital cases, that have no statute of limitation at all. And in every case, there is a doctrine that has emerged in civil litigation, and that is, that if you don't file your complaint within the statute of limitation, within two years, you are forever barred from litigating that case. And the defendant is protected from being attacked at some later date. "But there's another doctrine that is equally important, that is, if you satisfy the filing of the complaint within the two year period, the courts permit you to file amended complaints after the two year period. And they have a doctrine they call relation back; for lawyers, a rather metaphysical kind of event, that means essentially, that the amended complaint is as if it were filed on the original date. And that is the concept you'll find universally, in every court system in the United States. It was not, initially, anything found in any statute. You won't find it in our statutes, either. What you will find in the rulemaking powers of the Alaska Supreme Court, they have finally adopted, in the civil rules, copying the federal civil rules, a specific provision that identifies this doctrine of relation back...you'd find it at Civil Rule 15(C). "That brings us now to statutes of limitations on the tax side. The position taken by the Department of Revenue, and its practice was, that it had to file an assessment in a tax year, within the three-year statute of limitations. If it didn't do so, it was gone forever. But if it did file as it has, I think, conscientiously tried to do in every case, but not always succeeding, filed within the three year period, it would be free to later amend the complaint, the assessment, and that later amendment would relate back to the original date. It will have satisfied the statute of limitation. "That was the practice with this tax statute, and earlier ones dealing with individual income tax. We operated under this very tax regime for nearly 10 years before the issue was challenged by a taxpayer, Exxon, and they said, `Look, our interpretation of the law is, that three years is three years. And your idea that it relates back is wrong. You have to do it all within the three years period.' That's the controversy, is one of statutory construction. But, as I say, it was raised for the first time nine years into the tax regime that we're talking about here. The issue was briefed. The initial decision at the administrative level was that the state position was right. That was appealed to the Superior Court. The Superior Court reversed [the decision] and concluded that the state's position was wrong. That [decision] was in turn appealed to the Supreme Court. That argument is actually to be heard on May 18. "But that really isn't the genesis of the controversy. That led the administration to do two things: (1) to proceed on the appeal itself; and (2) to introduce, last year, SB 185. That bill took on not only the three-year statute of limitations, asked this body to affirm the state's interpretation of the act, but also to deal with the six- year statute of limitations on collections. "Now, the six-year may be a lot easier, it's basically to say: Look, State of Alaska, you have six years to collect a tax once you finally know what it is, and once the taxpayer knows what it is. There was a second case that involved Tesoro. Tesoro said, `State of Alaska, you assessed the tax on time, that's not a problem. But it's taken a long time to go through the administrative appeals and into the courts. In fact, it's taken more than six years and - ah, ha! While we owe the tax, because you didn't collect it within six years of the assessment date, we don't have to pay.' That went to the Superior Court. The Superior Court said, `No, you're wrong.' There is also an implied doctrine, and it's fairly uniform, that the six-year statute can be tolled, that is, held in abeyance, until the final tax determination has been made. "We have a decision from the Superior Court that was appealed to the Supreme Court and we settled it last year with Tesoro, after having waited 13 months after oral argument in front of the Supreme Court, for decision. Both parties decided it was probably one that we should resolve, and we did so. That led us then to this legislative session. There was testimony in the Senate, and I think correctly so, by taxpayers, saying that one of the problems we have is there is a lack of certainty; a lack of stability in our tax policy, to the extent that we don't know when the assessments are going to come. We need to have some finality. "The Administration heard that, and proposed a committee substitute, the one that is before you today, that would continue to affirm the state's past position, but make a correction for the future. That is to say, beginning this tax year, taxpayers can know that once they've filed, the state of Alaska has five years within which to issue an assessment or whatever number of (indiscernible) assessments to do, but after five years, you haven't done your job, that's it. State of Alaska, you cannot attempt to raise the assessment beyond that date. "We've had discussions with the industry over the last several weeks regarding this controversy. It has actually been an opportunity for some wide-ranging discussions that would try to solve several other long-standing controversies between the state and the industry. As a result of that, while I cannot suggest to you that we have reached agreement with the industry on any set of proposals, we have proposed and would like to distribute to you now a recommended committee substitute to this committee substitute for SB 377. With your permission, if I could provide that to your clerk for distribution." MR. BOTELHO provided a copy of the CS to the clerk for distribution to the committee. MR. BOTELHO explained the CS. "This proposed CS does several things. First of all, it focuses only on the oil and gas issues. Thus, it differs from the bill presently before you in the respect that it deletes all non-statute of limitations issues from it. That is the first difference between the bill the committee has and our proposed recommendation." CHAIRMAN VEZEY asked him to repeat his remarks and Mr. Botelho did so. MR. BOTELHO continued, "It has the retroactivity provisions, both for collections and for the statute of limitations on assessments; that is to say, affirming the Administration's long-held positions on both. It incorporates the five years for the future. And here are the add-ons that come with it: "One of our major sources of dispute with the industry has been over the treatment of gas liquids. We are proposing definitions that would make clear that the gas liquids at issue are gas rather than oil. This is a major concession on the part of the Administration in the sense that we have argued at length that these liquids should be treated as oil, and therefore taxed at a higher rate. The proposed language in this definition will treat them as gas. The second feature, focusing on the concern about stability and finality, is a provision which would allow the Department of Revenue to adopt regulations setting a methodology for oil valuation. Very much like what we have done in our various royalty settlements - we actually have three major settlement methodologies on the royalty side, one each with Exxon, BP, and ARCO, and then remaining producers on the North Slope are able to select among those three. We would like to see, and the Department of Revenue has been working at great length with the industry, to come up with a set of regulations satisfactory to all. "We would further be proposing a similar approach to gas valuation. Again, our efforts are aimed at providing certainty to the industry and to the taxing authority in trying to calculate what the obligations are. Various sections of this bill will have different effective dates. The retroactivity provisions dealing with the statute of limitations will go back to the inception of the statute. The definition with regard to gas processing plant, the key to the question of this gas liquids, would be retroactive to 1987, and that will have a consequence of some substantial tax credits to producers. "We urge the committee to put, and our version reflects it, a different effective date on the oil valuation methodology. That is, it should kick into place as soon as we have resolved with the remaining taxpayers, all disputes dealing with separate accounting. That was the tax that was in effect between 1978 and 1981. We believe that by doing so, the legislature will create a great incentive to early resolution of the remaining cases. We have four pending right now of the original, I think 40, taxpayers that were involved. This is what the Administration would recommend. To accomplish this, it would also be necessary for the committee and for the body to adopt a resolution amending the title that will require a two-thirds vote of each body. We have prepared such language." MR. BOTELHO sought out the clerk for distribution of the amended title language. "Finally, we have prepared a sectional analysis for the committee so that it would have an opportunity to review, perhaps, in less pressing moments, an opportunity to understand what this bill is about." Number 208 A clerk became available and was given the title information for distribution. MR. BOTELHO concluded his remarks by saying he was available for questions. Number 214 CHAIRMAN VEZEY said, "The first question I'd like to ask, Mr. Botelho, and you may not have great knowledge here so don't feel that you have to pretend you do, but I happen to remember that in the 70s -- the state of Alaska has been an oil-producer for about a quarter of a century. In the 70s we brought experts from all over the world up here. These statutes were not thought of by a bunch of people who had never been involved in oil. This was put together by some of the best minds in the country under the auspices of the legislature that very much wanted these tax revenues. Why are we having so much difficulty in defining terms? The oil industry has been producing oil for a century in this country." Number 223 MR. BOTELHO responded, "I think it's a very good question and also a difficult one to answer. I think that it is reflected in part by the fact that you really are talking about at least three different periods in our state history, if we just talk about the last, say, 18 years. The statute of limitations issue really evolved in 1976; if you look at the legislative history there's almost none because it's described as simple housekeeping. 1976 also marked the year that we started dealing with legislation on separate accounting and revisions to the production tax that carried over to 1977 and 1978. We had the lawsuit that was filed in 1979 by the producers, challenging the constitutionality of separate accounting, and that lead this body then to abandon it in 1981 in favor of what's called modified apportionment. "But to be more specific, there were a lot of experts. There were specific recommendations made. They invariably, as part of the political process, were modified. They were under constraints of time, the legislative pressures, modifications made in committees, modifications made on the floor. And as is often the case, particularly in the tax arena, the final ingredient is the willingness of the legislature to delegate authority to the commissioner of revenue to adopt regulations. In fact, I would say a good portion of the battles that have taken place over the statutes or over the tax scheme have been over the regulations. Do the regulations comply with or are supported by the underlying statutes. I would tell you that when lots of money is at stake it is an issue worth litigating between the state and the taxpayers, and done in good faith on both sides. I think the human experience is that when there's a controversy over lots of money people are willing to fight very hard. That's not to detract either side... I think that explains - - You set up a fairly broad scheme, you leave it to regulators and administrators to adopt regulations, again, their primary view is to maximize returns to the state consistent with the law, and taxpayers who challenge whether the administrator had the authority to do so." Number 263 CHAIRMAN VEZEY said, "Thank you. You do seem to be quite familiar with how we got to where we're at. But all these other 20, 25 oil producing states in the nation, they've been assessing oil since before the turn of the century, certainly since the 20s in a big way, why do we have questions in law over things like the definition of `three years from assessment'? Why do we have questions in law about `six years for collection'? These terms have been around for a long time." Number 271 MR. BOTELHO commented, "They have, Mr. Chairman. Again, that's why we're fairly confident about prevailing in the Supreme Court. The difficulty is you have judges who are literalist. You have judges who are very aware of these doctrines, not written down, but which are accepted, like relation back. And so you can come up with legitimate differences. As I indicated to you, we don't have a legislative history on the three- and six-year statute of limitations here. So it becomes an opportunity to litigate. There is a lot of money at stake as well. Having said that, I don't want to suggest this is a grab for a tax break by industry. They are legitimately frustrated at the same time with the length of time it has taken to resolve these tax disputes. Coupled with a good argument to be made on the statute of limitations, there is an equitable side to it as well, which is saying, `Enough is enough, this has dragged on long enough, we may be responsible for part of it, but the state is as well," and we're going to put it to the test right now." Number 292 REPRESENTATIVE HUDSON asked, "Mr. Attorney General, it seems like the adoption of regulations appears to be one of the major elements in the revisions we have here, in order to develop the stability and finality that the oil people are claiming that they don't have at the present time. Can you amplify that just a little bit? How are they developed so as to satisfy, for example, the industry?" Number 300 MR. BOTELHO responded, "The Commissioner and Director Pilkinton, along with the staff of the Department of Law, have been engaged in a cooperative effort with members of the (indiscernible) tax committee, and that effort has been going on for several months. We have set a goal of early June in reaching agreement. We have six different working groups in six different tax issues working towards resolution. I think you would find that, without exception, the industry indicating that we've made great strides towards reaching consensus. We're not all the way there, but I think the attitude both within the Administration -- I'm talking about the audit and attorney level, the line people -- feel comfortable about the direction we're going as well. But most importantly I think the industry has been pleased that we've stepped up to the plate to try and solve issues that we have previously lobbed grenades back and forth over in the last several years. Number 318 CHAIRMAN VEZEY asked, "Before we take any more questions, Mr. Botelho, would it be your interest to go through this proposed committee substitute and different sections and explain the whole bill? Would you like to explain the differences? How would you like to...?" Number 322 MR. BOTELHO said, "Mr. Chairman, I know you're under a great time constraint here. I would be glad to do just a very brief overview, if that would be helpful, or to continue answering questions at your pleasure." Number 326 CHAIRMAN VEZEY responded, "If you would, let's please do a brief overview first so we'll have a little more of a basis for where we're at." Number 327 MR. BOTELHO stated, "Section one is important from the standpoint that it sets forth the basic findings for this legislation and it focuses on the statute of limitations issue. First, again, affirming that the state's interpretation about the three years, that is, the relation back doctrine, has been the correct interpretation, and, secondly, that with regard to the six-year statute on collections, that the state has six years from the time there has been a determination about how much is owed. The findings also specifically address the fact that industry has expressed concern about the lack of finality, and that is the justification to going to a five year prospective, beginning this tax year, statute of limitations after which there would be an absolute bar. "Section two is the reaffirmation in language to the three- year statute, to make clear what we believe has been the case all along, that the state is free to amend the assessment after the three year statute has taken place. "Section three is on the collections, six-year statute. While there is an appeal pending, the six year statute of collections is on hold, and until their final determination is made on the tax, the state clock does not start running. "Section four refers to the proposed valuation methodology for the future on oil, and provides that the department shall adopt regulations. The regulations we're talking about, the sidebars that are found in this, are really the sidebars we have already negotiated in the regulations project with the industry. Number 366 CHAIRMAN VEZEY interjected a comment: "Section four is rather long, and I'm sure there's more not here than here." Number 367 MR. BOTELHO said, "That's right, and I misspoke, also, Mr. Chairman. Section four also includes a section for prevailing value for gas. This has been a concern, particularly for certain Cook Inlet producers, and we've been working with -- Our goal has again been to adopt regulations which will provide them similar certainty. Their primary interest is to see the royalty valuation methodology adopted, and we have left that as an option. We're still, I think, frankly, in discussions, with them. "The next substantive section, and I think the meat of the bill -- actually Section five and Section six are those dealing with the gas processing plant, the combination of what to do with gas liquids. They really are tied together, though, the consequence of which is to permit those liquids to be treated as gas rather than oil, and therefore, be taxed at a lower tax rate. This language has been the result of some fairly intense negotiation with industry over exact language, and I think reflects the industry's views. "The remaining provisions are effective date provisions and what we believe is a very important clause here, the nonseverable provisions; important, because we see this as a package deal, one that we believe may be seen retroactively as being somewhat punitive, though, as we say, we see it as simply an affirmation of our current position, but one which prospectively should be of great incentive and great interest to the industry as well as to the state in narrowing differences, eliminating controversies where we can, and obviously, in a couple of respects, actually having direct monetary benefits, tangible benefits to the industry now." Number 408 CHAIRMAN VEZEY interjected, "If we can, briefly, go back...[in] Section four I believe I heard you comment that that had been worked out in consultation with the industry?" Number 412 MR. BOTELHO explained, "Mr. Chairman, that is correct. The language that we have here is largely language that we received from the lead taxpayer. It probably would not be inappropriate to indicate that this is language that had been originally proffered by BP in discussions with the state, and is language that ties in directly with language that AOGA has proposed jointly with the state in the regulations project that the commissioner spoke of earlier. So this basically is a direct authorization for the regulations which the department would intend to adopt later this summer." CHAIRMAN VEZEY commented, "And Section seven makes the, well, Section two, which is the tax assessment period retroactive to January, 1976." Number 431 MR. BOTELHO said, "Yes, that is correct, Mr. Chairman, and that date is the effective date of the initial legislative act creating the three-year statute of limitations on assessments, and the six-year statue of limitations on collections. There are two other retroactive provisions, Mr. Chairman. Section eight, which is the retroactive provision for the gas liquids issues, and which would have the consequence of retroactive payments, in essence, to the industry; and the final, key departure from the normal effective dates, is our proposal that the oil valuation methodology statute not take effect until we have resolved the remaining separate accounting cases. As I said, we suggest this primarily as an incentive to those taxpayers in the state to reach early resolution, because the benefits prospectively on a fixed methodology, we think, are of great value, both to the industry and the state." CHAIRMAN VEZEY thanked Mr. Botelho and asked if there questions for him. Chairman Vezey recognized Representative Ulmer. Number 457 REPRESENTATIVE ULMER said, "You know, Bruce, most legislators want to be fair to both the oil industry and the people of the state, and want to strike a balance, and I am glad you are proposing a CS for us to consider, but I want to return to the second question that I asked the commissioner of revenue. How different are we from other states? Because one of the things that we hear a lot is that if the state of Alaska adopts this legislation, that we're somehow sending the signals to industry that this is not a friendly place to do business, and that we may be somehow discouraging the industry here. I don't think this legislature wants to do that, and that's why I'm curious, how different is the way in which we treat the assessment, the tax collection, and the retroactivity that we've been discussing - how different is that from other states and other oil jurisdictions? And if you can't answer that today, I would appreciate that answer at some point because I think it is relevant to the issue of whether we're being fair or unfair." Number 475 MR. BOTELHO commented, "I think that's an important question, and it's one I think all of you have raised at one point or another, individually, and appropriately so. Our tax structure, that is to say, first, how we resolve tax disputes, is one of three major models used by all the states. You have some states that have tax courts rather than an administrative tribunal within the Department of Revenue or sometimes called the Department of Tax, or Taxation, or Franchise Board. You have a third model, which is an administrative body, but placed somewhere outside of your tax collecting agency itself. Alaska is very much within the norm there. With regard to the statute of limitations, ours is very similar and, as I said, the doctrine of relation back is one that is generally accepted around the country and in that sense I think quite fair. There is no doubt that by asking you to say that retroactively we are right, is something unusual, especially to carry back this far. The law, I think, is clear, and I think if you were to ask your legislative counsel, they would advise you, as our own research has shown, that you clearly have the authority...there are no constitutional impediments. "The fact that there are delays in our tax system that drag out so long are actually also fairly typical. When we were before the Senate Labor & Commerce Committee, that very question was asked. Staff for the committee made inquiry to other oil-producing states which responded that they too had cases that were dragging on. We've got examples, in California, I think, of a recent settlement that went back to 1962. It's not unusual when you're talking about the hundreds of millions of dollars at stake, they're the largest kinds of cases you'll find in any court system, they will be strenuously litigated. You'll find the best lawyers in the country fighting on both sides, frankly; that tends to drag these out. And it's simply a recognition that probably the length of time will be directly proportional to the amount at stake and the complexity of the issue. That, I think, is what we've been faced with here. "The most difficult part, though, is I think the key question: what message are we sending? This Administration sees that the industry is a key ingredient to the state, and that it's in our interest to make sure that it is as healthy as it can be, and that we ourselves contribute to that. In that regard, it is important to try and bring the past to a resolution as quickly as possible. It is also fair to the people of the state, that we collect what we're fairly owed. Not a dollar more, but probably not a dollar less, either. And I think the industry appreciates that. I will tell you that I have dealt with, I think, virtually every major producer in this state, and I've never heard a company say, `We want to pay less than what we think we owe.' I think for the most part they have been very receptive, and they understand that there is a process for resolution. But we've also allowed years to drag out, here, and it's become a thorn to the industry. Our goal has been to try and force it to resolution. Our view had been that with passage of the bill it would force the remaining taxpayers -many of them have paid up all those taxes that might be affected by statute of limitations, but there are some who have not - by passing the bill it would force us to bring it to early resolution rather than waiting a month, or several months, or a year, for a Supreme Court decision. "The final analysis is really it's a state of mind. Can the industry see that what we're trying to do is clear up the past and also remove impediments to certainty for the future? And I think the committee substitute that we proposed is really one that deals frankly, forcefully, with the past; it provides us with some pressure to bring it to resolution; it creates some incentives to bring it to resolution; but, finally, make some changes that will benefit the entire industry and bring certainty, even those that we're not otherwise in contention with right now. And the five year statute does that. The definition that deals with gas liquids, providing a methodology in the future for oil and for gas, will go a long way to eliminating a battle generating today that we'll be duking out ten years from now. It won't have to happen again. We don't want it to happen again. "Mr. Chairman, again, I know I've taken up a lot more time than you had hoped. I appreciate the opportunity to address you." Number 587 CHAIRMAN VEZEY thanked Mr. Botelho for his testimony. "I would like to clarify, if this was to become law, you're not thinking that we would not be auditing all of these companies, still?" Number 591 MR. BOTELHO said, "No, Mr. Chairman, I think the level of auditing goes to a whole different realm. My sense would be that there would not be a need for the massive amounts we're spending on litigation. I think it might mean some reduction in staff, it would certainly mean for the Department of Law elimination of outside counsel. We obviously still have a backlog to clean up, and it's going to be a couple more years before we've accomplished that. But you have great leadership in the Department of Revenue. They've made great strides, I think, in catching up on the more recent years, so we will not see the gaps. We're fighting history, right now. And we have a chance to eliminate duking out 1978, 1979, 1980." Number 611 CHAIRMAN VEZEY again thanked Mr. Botelho for his time, saying he knew he had a busy schedule and needed to leave. Mr. Botelho thanked Chairman Vezey once again. Number 616 REPRESENTATIVE B. DAVIS asked, "Mr. Chairman, is it your desire that we move the CS?" CHAIRMAN VEZEY responded, "Not at this time, Representative Davis. We have a number of people who would like this opportunity to testify. The Senate was kind enough to let us have this room until 4:00. It is 4:00. The Senate doesn't seem to be wanting the room quite yet, so I'd like to continue the meeting for a little while, though we are supposed to go in session at 4:00. So I think we have maybe a few more minutes. But not terribly many. We had several people sign in to testify. I can't find my sign-in sheet at this time. But one of the names I do remember was Mr. Walt Furnace. Are you still with us, Mr. Furnace? He's not with us right now? He was. Okay. Would someone who has signed in to testify - let's see, here's one right here. This is - there we go. I'm sorry? Representative Kott? I can't read this one. This Mr. Paul Wessells? Is Mr. Paul Wessells here? Mr. Wessells?" TAPE 94-56, SIDE A Number 000 CHAIRMAN VEZEY said, the committee understands that you probably have not had a chance to review the committee substitute before us, so we'll understand that. PAUL WESSELLS, VICE CHAIRMAN OF THE ALASKA OIL AND GAS ASSOCIATION (AOGA) TAX COMMITTEE, testified on behalf of the committee. He said, AOGA's trade association, whose 18 member companies account for the majority of the oil and gas exploration, production, transportation and marketing activities in Alaska. Those provisions of SB 377 that would amend the three-year statute of limitations on assessments, that is AS 43.05.260, and the six-year statute of limitations on collections of tax, that is AS 43.05.270, would retroactive affect to January 1, 1976, are in substance the same provisions contained in SB 185. They were added to SB 377 as a floor amendment in the Senate. AOGA testified strongly against SB 185 during the hearings by the Senate Labor and Commerce Committee on March 22 and April 7 of this year. Rather than repeat those comments before this committee, Mr. Wessells distributed copies of that testimony to committee members for their review. MR. WESSELLS said for the reasons given in that testimony, AOGA opposes those provisions, i.e., the retroactive provisions. They represent bad policy for the state of Alaska, enacting them will be a terrible precedent, and will send a hostile message about Alaska to those who are already invested here and those who might be thinking about it. MR. WESSELLS thanked the committee for the opportunity to testify. Number 050 CHAIRMAN VEZEY said he thought everyone in the room was concerned that we do have vast untapped oil and gas potential in the state of Alaska and nobody wants to see us run those people with the capital and the technology out of the state of Alaska, but at the same time, there's an ultimate fairness, and that's what we're searching for. Number 059 REPRESENTATIVE HUDSON asked Mr. Wessells if he had seen and if his comments were based on the revised elements that were brought forward by the Attorney General just recently. MR. WESSELLS responded no, they were not. He said he was testifying on behalf of AOGA, who has not taken a position with respect to those items. CHAIRMAN VEZEY said he would not expect that the Board of Alaska Oil and Gas Association would not have had time to review this committee substitute. Number 069 REPRESENTATIVE ULMER asked Mr. Wessells if he would answer the two questions that she had asked of the commissioner of revenue and the attorney general. First, doesn't this simply bless the status quo. When you say it's a terrible precedent, it seems that your interpretation is that this is changing business as opposed to the Administration's testimony that it is continuing the status quo. Second, does this make Alaska significantly different than other states where we have oil development and oil taxation and the difference between Alaska and those other states, making us perhaps less competitive, the message, issue that you were raising, is this so very different from other states. MR. WESSELLS responded on the first item of status quo, he thinks that what is referred to today as the status quo, is referring to a method of operation that the Department of Revenue has followed for a number of years. He said, "It's not clear that is correct under the law of these particular statutes of limitation. In particular, the three-year statute of limitations on assessments, is a subject that is before the Supreme Court presently for a decision and presumably, if it's there, then there is some controversy about whether this practice is correct or not. So, I can't really see that it would be something regarded a status quo, or an accepted status quo." Number 100 REPRESENTATIVE ULMER said, "You're saying it may not be legal in the sense that the court may throw it out, or may not interpret it the way the Department of Revenue has used it. My question is do you disagree that that is what has been the practice in Alaska for at least 10 years. In other words, I'm trying to get at this issue of `are we changing the rules, or is this how business has been done for 10 years in Alaska,' I'm trying to get some help with that question." MR. WESSELLS responded that the practice that's referred to here is the status quo being an interpretation of the three- year statute of limitations which says that it is suspended during the course of an appeal by a taxpayer of an assessment, and indeed, that has been the interpretation which the Department of Revenue has placed on that statute during this period of time. He further stated, because they have interpreted it that way does not mean that the taxpayers who are subject to these taxes necessarily agree with that interpretation. So, it has been an issue of controversy for some time and this bill attempts to settle that controversy, legislatively, on the presumption that this is an accepted practice and this is what the law really means and really is, rather than having that particular controversy decided by the Supreme Court. Mr. Wessells said if what you mean by the status quo is a practice that the Department of Revenue is undertaken, I think that is correct. But speaking for the members of the Alaska Oil and Gas Association, Mr. Wessells said they don't believe that is a correct way to operate. In response to Representative Ulmer's second question regarding how Alaska differs from other states, MR. WESSELLS said he couldn't speak for all the members, because he hadn't polled them on this particular question; however, speaking for the company that he is employed by, which is British Petroleum, he said at present they do not have any controversies with any other state that are as old as the ones that they have with the state of Alaska, nor have been as long-standing as these and stated he thinks that for the preponderance of the membership of the Alaska Oil and Gas Association, that is true, as well. Number 143 REPRESENTATIVE ULMER said, "But you're not sure if the law is significantly different in those other states than what Alaska is proposing here that might make us look very different to the oil industry." MR. WESSELLS responded he didn't think it's really a question of whether the law is different so much as it's the practice of determining tax liability and the procedures that are followed by the Department of Revenue in determining that liability, which causes the process to be protracted, very difficult to draw closure on and it is that particular problem which sticks out in the minds of people when they think about doing - at least the people in his company - when they talk about doing business in Alaska. It's the question of clarity and closure on the controversies regarding taxes that go back as far as 16 or 17 years. That's the problem. Number 160 CHAIRMAN VEZEY said one of the questions that keep coming up in his mind is some, if not most of these problems have existed back to 1978 when the tax (indiscernible) was enacted, there are tax statutes that have been amended, he thought eight times during that course of time, most of them more than a decade ago, why this impetus for this change comes up now after all these periods of years? He said he's starting to get the impression it's because we've not been able to resolve all these very old disputes. He asked Mr. Wessells to comment on why this is all of a sudden coming up, when we've not hesitated in the past to go in and change the tax codes, and now suddenly we feel we need to change the retroactive portion, which we didn't bother to address in the eight previous changes. MR. WESSELLS said he could only speculate about that because he's not the party that's proposing the change and thought the question needed to be directed to someone else. He stated he didn't feel it was appropriate for him to speculate on that motivation. Number 182 REPRESENTATIVE HUDSON asked Mr. Wessells the same question he asked the Commissioner; that is, under current law, the statute of limitations is three years, in which the department can assess and change assessments and things of that nature, and then it halts. He asked, "Is there in any other state, to your knowledge or even here, is it all or nothing at all at that point in time. That is, if the matter hasn't been fully settled, does the oil industry owe nothing, does the company owe nothing, or do they owe at the least, what they filed?" MR. WESSELLS said absolutely. He said, "The process as it works is a taxpayer prepares and files a return as of a certain date. This three-year statute that we're talking about begins to run so to speak, as of that date, it is three years from that time that the Department of Revenue can assess, that is make a claim and a demand for payment of additional tax. What we're talking about here is additional tax. It is that that the three-year statute refers to. So, it's not a question of taxpayers not paying anything, they've indeed paid quite a lot." Number 204 REPRESENTATIVE HUDSON said that was what he was asking before, and he got the impression that it was all or nothing at all. That's been his big concern. He said, if he was understand Mr. Wessells correctly, up to the three years, the initial taxpayer's filings and the various increases that are assessed by the department, puts a value that the department claims and puts a value that the company claims and is there any chance that the value at least that the company claims, is going to be lost to the state? The state is not going to lose everything? MR. WESSELLS commented that if Representative Hudson's understanding was, for instance, taking a particular tax period of one year, a taxpayer files its return and pays the tax as reported on that return, because of these statutes of limitations (indiscernible), it does not mean that the taxpayer can get that money back if they run. That money has been paid in and that cannot be recovered, unless the taxpayer files a claim for refund of that money. He said, "In this three year assessment, we're talking about claims for additional tax owed or claimed to be owed by the state, in addition to those that were actually reported in the return." Number 223 REPRESENTATIVE HUDSON asked about the six years. He said, "we're out here three years, the state's got a value, the company's got a value, there's a period of time where apparently, at the end of the six years, then is there a chance that under existing law, the state could lose everything?" Number 227 MR. WESSELLS, responded no, it would only lose those amounts that were included in the assessment that was made within the three year period. REPRESENTATIVE HUDSON commented that was different than what he understood from the department. Number 231 CHAIRMAN VEZEY asked Mr. Wessells if he had any insight regarding his comment that he was not aware of any other state that has this kind of backlog of audits and assessments. MR. WESSELLS said in his experience, yes. CHAIRMAN VEZEY asked Mr. Wessells to comment or elaborate on that. MR. WESSELLS stated that he was familiar with the controversies here in Alaska. He stated, "In our particular experience with my company, we've had controversies with other states, but they've not, in the time that I've worked for the company, I'm not aware of any that have gone on as long as 10 to 15 years. That's all I can say." CHAIRMAN VEZEY thanked Mr. Wessells for his testimony. CHAIRMAN VEZEY adjourned the meeting at 4:16 p.m.