Legislature(2009 - 2010)BARNES 124

02/10/2010 01:00 PM House RESOURCES

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Heard & Held
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Heard & Held
               HB 308-OIL AND GAS PRODUCTION TAX                                                                            
                [Contains discussion of HB 337]                                                                                 
1:45:14 PM                                                                                                                    
CO-CHAIR JOHNSON  announced that  the next  order of  business is                                                               
HOUSE BILL NO.  308, "An Act relating to the  tax rate applicable                                                               
to the  production of  oil and gas;  relating to  credits against                                                               
the oil  and gas production  tax; and  relating to the  period in                                                               
which oil  and gas  production taxes may  be assessed."   [Before                                                               
the committee was  the proposed committee substitute  for HB 308,                                                               
labeled 26-LS1328\E, Bullock, 2/5/10 ("Version E").]                                                                            
1:46:42 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  inquired  whether  another  committee                                                               
substitute (CS) will be coming before the committee.                                                                            
CO-CHAIR JOHNSON  responded that he  is not married to  Version E                                                               
and  it probably  needs  some minor  technical  changes that  are                                                               
cleanup, but not anything major.                                                                                                
REPRESENTATIVE GUTTENBERG  requested that  members be  given some                                                               
leeway with amendments  that they may have for  the sections that                                                               
are to be changed.                                                                                                              
CO-CHAIR JOHNSON agreed.                                                                                                        
CO-CHAIR NEUMAN  encouraged members  to talk  to the  sponsor and                                                               
the Department of Revenue about the bill.                                                                                       
CO-CHAIR JOHNSON  added that he  wants everything on  the record,                                                               
but that Co-Chair Neuman's suggestion  would provide for a smooth                                                               
process in committee.                                                                                                           
1:48:32 PM                                                                                                                    
PAT  GALVIN, Commissioner,  Department  of  Revenue (DOR),  noted                                                               
that Governor  Parnell's oil tax  amendment bill [HB  337/SB 271]                                                               
was read across  both floors today.   Therefore, while presenting                                                               
the department's perspective on HB  308, Version E, he and Deputy                                                               
Commissioner Davis will also tie  in the governor's bill with the                                                               
committee's proposed CS.                                                                                                        
CO-CHAIR JOHNSON  urged that it  be the similarities  between the                                                               
bills that  are discussed  and not  the differences,  because the                                                               
committee has yet to notice the governor's bill.                                                                                
COMMISSIONER GALVIN agreed.                                                                                                     
1:50:13 PM                                                                                                                    
COMMISSIONER GALVIN commended the sponsor  for his intent to find                                                               
ways to increase jobs for Alaskans  and production in Alaska.  He                                                               
said  the governor  and the  administration share  this goal  and                                                               
want to work  with the sponsor in finding the  most effective and                                                               
efficient  way to  reach that  goal.   Today's presentation  will                                                               
look  at how  Version E  would  function from  the Department  of                                                               
Revenue's perspective,  how the  provisions would  be implemented                                                               
by the  department, and the issues  that need to be  addressed in                                                               
order to properly  implement those provisions.  He  and Ms. Davis                                                               
will  also talk  about  some of  the  trade-offs associated  with                                                               
different ways  of trying  to accomplish  the goal  of increasing                                                               
production and increasing jobs.                                                                                                 
COMMISSIONER GALVIN  noted that  both HB  308 and  the governor's                                                               
bill would provide increased credits  and an increased definition                                                               
for  new  drilling activities  within  existing  fields, and  the                                                               
department views  this as very  valuable and favorable.   He said                                                               
the department supports the purpose  of [Section 15 in Version E]                                                               
to maximize Alaska hire in the  oil patch, which would be done by                                                               
providing  a tax  rebate.   The state  has always  struggled with                                                               
finding  ways to  do  this  within the  constraints  of the  U.S.                                                               
Constitution and  elsewhere; therefore,  he will talk  about this                                                               
issue in  terms of  the mechanism  that is  provided and  not the                                                               
legal side.                                                                                                                     
1:52:43 PM                                                                                                                    
COMMISSIONER   GALVIN  recognized   that  Version   E's  proposed                                                               
progressivity change is intended  to bring the progressivity rate                                                               
to a  level similar to  that in  the original Alaska's  Clear and                                                               
Equitable Share  (ACES) measure.   He noted, however,  that there                                                               
are  two   differences.    The   more  significant  of   the  two                                                               
differences  is  the package  of  the  tax  that is  provided  by                                                               
Version  E.   Reducing the  progressivity does  not put  in place                                                               
what was  seen as  the tradeoff  for that  reduced progressivity,                                                               
which was a  gross-based floor on the two major  fields to ensure                                                               
the state  had revenue at  low price;  this was the  tradeoff for                                                               
the lower  take at high prices.   When that low  price security -                                                               
the  guaranteed  revenue   to  the  state  -   was  removed,  the                                                               
progressivity was  supported to go  up to provide a  risk balance                                                               
that the administration felt was  appropriate given the amount of                                                               
state credits and  participation at the front end of  all the new                                                               
investment.   That was a package  when that part of  the bill was                                                               
included  in the  original proposal.   The  second difference  is                                                               
technical.   In the original  ACES proposal  there was not  a 0.1                                                               
percent escalation  beyond the  50 percent total  rate.   He said                                                               
the  department's presentation  will  provide  from an  empirical                                                               
standpoint what that change means in terms of potential revenue.                                                                
1:54:38 PM                                                                                                                    
CO-CHAIR  NEUMAN  maintained that  there  is  a tradeoff  between                                                               
creating  jobs and  generating revenue,  and that  those benefits                                                               
outweigh  the revenue  to  the state  because  of other  revenues                                                               
generated beyond that.                                                                                                          
COMMISSIONER GALVIN responded  that the intent is  to create jobs                                                               
through   the  investment   in  oil   and  gas   exploration  and                                                               
development.  The issue for the tax  system is to find not just a                                                               
balance,  but also  a  structure that  maximizes  benefit to  the                                                               
state  in  terms   of  revenue  and  ensures   a  structure  that                                                               
incentivizes  investment  in  new  exploration  and  development.                                                               
That is  where the question  of changing the  progressivity comes                                                               
in.  Changing the progressivity  will result in less money coming                                                               
to the state  and more money staying with the  taxpayer, but does                                                               
it result in  new investment?  There  will be a lot  of debate on                                                               
that.  From the administration's  perspective at this time, given                                                               
the  information the  department has  received from  companies in                                                               
the  industry, there  is no  commitment to  take any  tax savings                                                               
that would  result from a  lower tax rate  and turn it  into jobs                                                               
and  investment.    However,  a  structure  that  emphasizes  the                                                               
credits  will   ensure  that  the  state   benefits  because  the                                                               
reduction  in  the  tax  only  goes to  those  who  actually  are                                                               
investing and creating jobs in the state.                                                                                       
1:57:13 PM                                                                                                                    
COMMISSIONER  GALVIN agreed  that  the policy  issue of  choosing                                                               
between increasing  revenue to  the state  or increasing  jobs in                                                               
the state  is a valid question.   The analysis comes  down to the                                                               
relative tradeoff  - will the  state forego a  significant amount                                                               
of revenue to create a handful of  jobs, or is the state going to                                                               
forego a  smaller amount of  revenue to  create a lot  more jobs.                                                               
That is the  crux and is something members will  have to get from                                                               
the  analytical  information  the  department  will  provide  and                                                               
perhaps from testimony from people  that will actually make those                                                               
decisions.     He  explained  that   from  a   purely  analytical                                                               
standpoint, a  direct relationship can be  seen between providing                                                               
credits for actual  work resulting in actual jobs  and being able                                                               
to quantify what  that cost the state.  This  gives the state the                                                               
ability to  provide a  rational explanation for  why it  is doing                                                               
that.   It is  difficult to  provide the  same linkage  between a                                                               
drop in a  tax that just goes  back to a company  and the company                                                               
gets  to decide  what  to  do with  that  investment because  the                                                               
linkage is not in  actual numbers.  In such a  case, the state is                                                               
merely hoping the company will bring it back into the state.                                                                    
1:58:59 PM                                                                                                                    
COMMISSIONER GALVIN pointed  out that there are two  parts to the                                                               
interest rate  provision in  HB 308,  Version E.   One part  is a                                                               
waiver  of the  interest that  would be  due on  underpayments of                                                               
taxes that are due to  regulations that are retroactive.  Because                                                               
of  the complexity  of the  changes made  in the  law by  ACES, a                                                               
series  of regulations  have  had  to be  developed  in order  to                                                               
refine  for  the  taxpayer  the  implementation  method  and  the                                                               
interpretation method.   By statute  those regulations  are being                                                               
made  retroactive to  when  ACES became  effective  and, in  some                                                               
cases,  actually  retroactive  all  the  way  back  to  when  the                                                               
production profits  tax (PPT) became  effective.  Thus,  they may                                                               
result in underpayments  because in good faith  the taxpayer made                                                               
payments that  it thought  would be correct.   The  Department of                                                               
Revenue shares the  sponsor's view that it is fair  to waive that                                                               
interest to address that particular issue.                                                                                      
2:00:38 PM                                                                                                                    
REPRESENTATIVE OLSON  asked whether  the department  is expecting                                                               
any lawsuits in regard to going back that far.                                                                                  
COMMISSIONER  GALVIN replied  that the  department is  unaware of                                                               
any pending lawsuits.   In further response, he said  most of the                                                               
regulations  are  now out  and  he  believes the  department  has                                                               
significantly mitigated  the risk of  such a lawsuit  through the                                                               
method used  to develop  the regulations.   He explained  that in                                                               
the typical regulation development process,  a draft is sent out,                                                               
comments are taken,  decisions are made behind  closed doors, and                                                               
then  a  final  regulation  is  sent out.    In  this  case,  the                                                               
department  has had  a  much more  interactive  process that  has                                                               
engaged the  industry so that  industry has seen  the development                                                               
over  the  course of  the  past  couple  of  years and  has  been                                                               
involved in  the department's  analysis of how  it will  work and                                                               
what the implications  will be.  Therefore, he sees  less risk of                                                               
industry feeling it was unfair  or a surprise or an inappropriate                                                               
lag  time  because industry  participated  in  creating that  lag                                                               
time.  He  said he is not expecting the  department to be putting                                                               
out any modified records of decision (MROD).                                                                                    
2:02:24 PM                                                                                                                    
CO-CHAIR  JOHNSON   understood  that   current  law   allows  the                                                               
department to  forgive the penalty on  the tax debt, but  not the                                                               
COMMISSIONER  GALVIN answered  correct.   The department  has the                                                               
authority   and  the   discretion  to   waive  the   penalty  for                                                               
underpayment, but not the discretion  to waive the application of                                                               
interest for underpayment.                                                                                                      
COMMISSIONER  GALVIN stated  that  the department's  presentation                                                               
will  also  address the  restoration  of  the 3-year  statute  of                                                               
limitations that is proposed by HB 308, Version E.                                                                              
2:04:01 PM                                                                                                                    
REPRESENTATIVE  SEATON  inquired  whether  application  of  lease                                                               
expenditure regulations  is somewhat mitigated due  to the sunset                                                               
of the standard deduction.                                                                                                      
COMMISSIONER  GALVIN  responded  that   in  general,  yes.    The                                                               
definition of  lease expenditures  applies to both  operating and                                                               
capital expenditures,  the two components of  lease expenditures.                                                               
The  so-called standard  deduction,  which  expired December  31,                                                               
2009,  basically froze  the allowable  lease expenditures  on the                                                               
operating  side for  Prudhoe Bay  and Kuparuk.   Since  those are                                                               
larger fields and a larger  taxpayer, that would be a substantial                                                               
portion of any potential change  that might come about because of                                                               
the operation  of the lease  expenditures.  The  supposition that                                                               
it reduced  the potential effect  of the  retroactive application                                                               
of the regulations is thus correct.   Over the last couple years,                                                               
lease  expenditures   have  been  fairly  evenly   split  between                                                               
operating  and  capital expenses.    Therefore,  from a  taxpayer                                                               
standpoint,  a substantial  portion  of half  of  what the  lease                                                               
expenditure  is  defined will  be  unaffected  by the  change  in                                                               
2:06:37 PM                                                                                                                    
REPRESENTATIVE SEATON, in regard  to the retroactive application,                                                               
surmised that  what is really  being looked at are  problems with                                                               
underpayment  or  those  things  that  would  relate  to  capital                                                               
expenditures   because  operating   expenses  were   fixed  until                                                               
December 2009.                                                                                                                  
CO-CHAIR JOHNSON interjected  that he thinks the  number was also                                                               
based on 2006.                                                                                                                  
COMMISSIONER  GALVIN, in  response to  Co-Chair Johnson,  replied                                                               
right.   It was the 2006  grossed up to be  annualized because it                                                               
started  in April,  and then  moved forward  with the  escalation                                                               
factor.  In response to  Representative Seaton, he said there are                                                               
some  operating expenditures  associated with  other fields  that                                                               
would be affected by the  lease expenditure definition, but it is                                                               
correct that  for the  most part  it is going  to be  the capital                                                               
expenditure portion that is affected.                                                                                           
2:07:57 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG,  in regard to the  standard deduction,                                                               
asked whether additional perspective  on the industry was learned                                                               
that  allowed  the  Department   of  Revenue  to  understand  tax                                                               
structure and how it affected those companies.                                                                                  
MARCIA DAVIS,  Deputy Commissioner,  Office of  the Commissioner,                                                               
Department of  Revenue, answered that  after passage of  ACES the                                                               
department immediately  undertook an audit of  the 2006 operating                                                               
expenditures  for  both Prudhoe  Bay  and  Kuparuk.   This  audit                                                               
established the  baseline from  which an  indexed value  could be                                                               
applied for what would be  allowable lease expenditures - from an                                                               
operating expense  point of view for  those two fields -  for the                                                               
rest of  2006 and  all of  2007, 2008,  and 2009.   So,  yes, the                                                               
department was able to better  understand and learn how operating                                                               
expenses were  charged across the  field, how they  were grouped,                                                               
and where  the data  was.   The department  engaged with  the two                                                               
operators and  obtained the  charge systems for  both sides.   In                                                               
turn,  the   operators  received  immediate  feedback   from  the                                                               
department as to what  was in and what was out  of the bucket for                                                               
lease  expenditures and  that served  as guidance  for them  even                                                               
though a formal regulation was not yet in place.                                                                                
2:10:02 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG,  in regard to  taxpayers understanding                                                               
what  constituted   an  allowable  expense  under   the  standard                                                               
deduction, inquired whether industry  had an issue when operating                                                               
costs went above the standard deduction.                                                                                        
MS.  DAVIS stated  that the  2006 level  was the  level that  the                                                               
department accepted  as the beginning  of the indexed year.   She                                                               
advised  that she  can speak  with reference  to Prudhoe  Bay and                                                               
Kuparuk because they each contain  more than three taxpayers.  In                                                               
each of  those instances, each  taxpayer reports its own  view of                                                               
its  operating  expenses  on  a  year-to-year  basis,  and  these                                                               
reports  do  not  necessarily  match  one  another  because  each                                                               
taxpayer has its own accounting  and allocation systems.  Looking                                                               
at them  as a group,  the reported operating  expenditures exceed                                                               
by a small amount the standard  deduction on the Kuparuk side and                                                               
on the Prudhoe Bay side it  was a little larger than for Kuparuk.                                                               
In   both  instances   the  actual   expenditures  exceeded   the                                                               
limitation  imposed  by  the  standard  deduction  for  operating                                                               
expenses for the following years.                                                                                               
2:11:52 PM                                                                                                                    
CO-CHAIR  JOHNSON asked  whether  the amount  above the  standard                                                               
deduction is in the tens or hundreds of millions of dollars.                                                                    
MS. DAVIS answered that it depends  upon the year.  Some years it                                                               
might be  less than $100 million  and some years more.   She said                                                               
she does  not have the  actual numbers  before her and  it covers                                                               
about three years.                                                                                                              
CO-CHAIR  JOHNSON inquired  whether the  actual numbers  would be                                                               
MS.  DAVIS responded  that  she  would have  to  be reporting  an                                                               
averaged number.  In further  response, she agreed that generally                                                               
the number is in the hundreds of millions of dollars.                                                                           
2:12:45 PM                                                                                                                    
COMMISSIONER   GALVIN  clarified   that  while   the  amount   of                                                               
additional  lease expenditure  that the  taxpayers experience  is                                                               
greater  than the  standard  deduction in  the  three years,  the                                                               
impact on  their tax liability  was different  in each year.   In                                                               
2008,  for  example, their  price  was  significantly higher  and                                                               
progressivity was higher.  Therefore,  the impact of the standard                                                               
deduction  was significantly  greater on  their tax  liability in                                                               
2008  than it  was in  2009, even  though the  difference in  the                                                               
actual spending level was fairly similar.                                                                                       
CO-CHAIR   JOHNSON  presumed   that  this   was  a   function  of                                                               
progressivity and price.                                                                                                        
COMMISSIONER GALVIN replied yes.   In further response, he agreed                                                               
that the  amount of money being  talked about is in  the hundreds                                                               
of millions of dollars.                                                                                                         
2:13:37 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  surmised that  the other side  of that                                                               
equation is  that the  taxpayers' profits  had escalated  quite a                                                               
bit, so  the taxpayers were  making more money while  paying more                                                               
COMMISSIONER GALVIN answered right.                                                                                             
2:13:59 PM                                                                                                                    
MS.  DAVIS  began  her   PowerPoint  presentation  providing  the                                                               
administration's comments on  HB 308, Version E.   She noted that                                                               
the Department of  Revenue has reviewed the bill in  terms of how                                                               
it would  implement the  provisions.  In  regard to  the proposed                                                               
resident  worker  tax  rebate  [in Section  15],  she  said  that                                                               
Version E is  unclear as to whether the rebate  would affect only                                                               
the taxpayer's/producer's  own discreet workforce, or  would also                                                               
include the workforce of the  contractors that a producer engages                                                               
for the  various North  Slope operations  [slide 3].   This  is a                                                               
significant  distinction for  the department  when reviewing  the                                                               
numbers,  she  pointed out,  because  the  vast majority  of  the                                                               
workforce is employed  at the contractor level,  not the producer                                                               
level.  She asked for clarification in this regard.                                                                             
2:15:57 PM                                                                                                                    
CO-CHAIR JOHNSON responded  that the intention is  for the rebate                                                               
to apply  to both the  producer and the  contractor.  He  said he                                                               
will  work  with   the  Department  of  Revenue   (DOR)  and  the                                                               
Department of  Labor &  Workforce Development  (DLWD) to  come up                                                               
with a CS that clarifies this.                                                                                                  
REPRESENTATIVE GUTTENBERG  said this  was his  concern also.   He                                                               
directed attention  to page  29 of  Mr. Dan  Dickinson's 2/8/2010                                                               
PowerPoint  presentation [which  lists the  top employers  in the                                                               
oil and gas  industry] and pointed out that the  slide states the                                                               
list   does    not   include    catering/security,   engineering,                                                               
transportation, communications, and construction.                                                                               
CO-CHAIR JOHNSON reiterated that there will be a CS.                                                                            
2:16:44 PM                                                                                                                    
MS. DAVIS  continued her presentation,  noting that Section  2 of                                                               
Version E  requires the individual  charged with  maintaining the                                                               
labor workforce data  to keep that data for 3  years.  Regardless                                                               
of whether this  bill is passed and the tax  assessment period is                                                               
changed from six  to three years, the Department  of Revenue will                                                               
look for  a continuity of records  being retained for as  long as                                                               
the tax  question remains open.   Therefore, it would  be helpful                                                               
to  the  department to  have  this  language modified  to  state,                                                               
"three years, or  the close of the relevant tax  year."  Further,                                                               
if the  bill is clarified  to include contractors, it  would help                                                               
the  department if  in  Section 15  [page 6,  lines  7-11] it  is                                                               
clarified that the  word "incurs" includes direct  labor costs as                                                               
well as labor costs incurred through a contractor.                                                                              
2:17:55 PM                                                                                                                    
MS. DAVIS observed that the  rebate use and payment mechanism for                                                               
the  local  hire  provision  is  unclear  in  terms  of  how  the                                                               
department would implement  it [slide 3].  Version  E couches the                                                               
incentive in the form of a  rebate and has the rebate arise after                                                               
the filing of  the annual report that  is due on March  31.  What                                                               
actually  happens in  the state's  tax world  is that  a taxpayer                                                               
looks through the year and  files monthly payments that are based                                                               
on estimates  of what the taxpayer  thinks its tax bill  is going                                                               
to be.   Each month the taxpayer  will true up its  payment as it                                                               
learns more and more what it thinks will be its tax bill.                                                                       
MS.  DAVIS said  the  department is  therefore  looking for  some                                                               
clarity  from  this  committee  as   to  whether  a  taxpayer  is                                                               
authorized  to  anticipate  that  it will  ultimately  receive  a                                                               
rebate and  can factor that  into the  monthly payments.   Or, is                                                               
the  intent   that  the  taxpayer   pay  its  tax   bill  without                                                               
consideration of the rebate such that  at the end of the tax year                                                               
the  Department  of Labor  &  Workforce  Development obtains  the                                                               
records and  verifies for the  Department of Revenue  whether the                                                               
appropriate hiring rate  has been met to qualify for  rebate?  In                                                               
that case it would truly act as  a rebate and would be similar to                                                               
how  the  department  does  credits.   For  example,  a  taxpayer                                                               
applies  for credits,  the department  gives it  a value,  and by                                                               
then the department knows what the  tax bill is and can apply the                                                               
credit or  rebate, which would be  similar to a certificate.   If                                                               
that  is the  mechanism, there  needs to  be clarification  as to                                                               
where the  money will come from  to pay the rebate;  for example,                                                               
whether it  would come out of  the credit fund that  is set aside                                                               
and renewed through general funds.                                                                                              
2:19:55 PM                                                                                                                    
MS. DAVIS referred  to the definition of  "resident worker" which                                                               
is provided by Section 15 [page  8, line 12] as being the meaning                                                               
given in another  section of the tax code [AS  43.40.092].  Under                                                               
[AS 43.40.092] a  resident worker may be required  to swear under                                                               
oath that he or she is in fact  domiciled in the state.  She said                                                               
it would be  helpful to know whether authority is  being given to                                                               
the Department of Revenue or  the Department of Labor & Workforce                                                               
Development  for administering  that  definition.   Someone  will                                                               
need to  create a form that  would be given to  the producers and                                                               
their contractors should  it become necessary for  an employee to                                                               
make that affirmation of residency.                                                                                             
CO-CHAIR JOHNSON related  that he is working  with the Department                                                               
of Labor  & Workforce  Development in this  regard.   He inquired                                                               
whether this is something that is  wanted in the statute or would                                                               
be handled through regulation.                                                                                                  
MS. DAVIS said it could be  handled through regulation as long as                                                               
something is  in this statute  that gives one of  the departments                                                               
the authority to implement that section of the definition.                                                                      
2:21:15 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG pointed out  that often a contract with                                                               
a contractor is seasonal  or for just a few weeks  or months.  He                                                               
posed  a scenario  in which  an Arkansas  contractor composed  of                                                               
three Arkansas employees is hired for  a short period of time and                                                               
that contractor then hires twenty  Alaskans.  He asked whether it                                                               
is only the  percentage of time that the contractor  is in Alaska                                                               
actually doing the job or also  count the time for paperwork that                                                               
is completed after the contractor is back in Arkansas.                                                                          
MS.  DAVIS replied  that she  would  defer to  the Department  of                                                               
Labor  & Workforce  Development in  this regard  because deciding                                                               
who is  a resident  or nonresident is  DLWD's jurisdiction.   She                                                               
said the  statutory definition seems  like a solid  definition as                                                               
to  what constitutes  an  Alaskan year  around.   Therefore,  she                                                               
would  say  that  the  seasonal  workers  in  the  aforementioned                                                               
scenario would not qualify as Alaska residents.                                                                                 
REPRESENTATIVE GUTTENBERG  stated that that  was not what  he was                                                               
asking and he will ask the  question of the Department of Labor &                                                               
Workforce Development.                                                                                                          
2:23:49 PM                                                                                                                    
MS. DAVIS continued  her presentation and advised  that Version E                                                               
does not address or make it  clear that the Department of Revenue                                                               
has the legal  authority to adjust the tax  post-audit [slide 3].                                                               
Currently,   the  department   has  the   right  to   review  the                                                               
information that the Department  of Labor & Workforce Development                                                               
acquires  from its  audits, but  there  is no  authority for  the                                                               
Department  of Revenue  to adjust  the tax  bill when  subsequent                                                               
review finds  that a rebate  was qualified or disqualified.   She                                                               
explained that the  department has the authority to  adjust a tax                                                               
bill  if  an  audit  finds  that  a  credit  was  inappropriately                                                               
granted, and  this just needs to  be expanded to ensure  that the                                                               
department  can also  adjust  the tax  bill if  it  finds that  a                                                               
rebate was inappropriately granted.                                                                                             
CO-CHAIR JOHNSON  inquired how the Department  of Revenue handles                                                               
the film industry's 10 percent rebate for local hire.                                                                           
MS. DAVIS  answered that the  department has not yet  audited one                                                               
of  those,  although the  regulations  are  out.   She  said  she                                                               
believes the  authority resides  in the  corporate income  tax to                                                               
adjust  the tax  on  audit.   She  offered to  look  at the  film                                                               
industry language and see how it has been addressed.                                                                            
2:25:29 PM                                                                                                                    
MS. DAVIS  pointed out  that the [portion  of Section  15], which                                                               
deals  with the  Department  of Labor  & Workforce  Development's                                                               
right to require the data  be made available for verification and                                                               
audit of the  certificates of residency, is written  such that it                                                               
only covers agents or employees  of such person, and a contractor                                                               
might not  fit that criteria.   Therefore, the language  needs to                                                               
be corrected to  ensure that the Department of  Labor & Workforce                                                               
Development has  the right to  review the contractor's data.   In                                                               
all  likelihood,  a producer  will  simply  ask a  contractor  to                                                               
provide a  document that verifies the  producer's compliance, but                                                               
the underlying data will reside with the contractor.                                                                            
MS. DAVIS  explained that the  Department of Revenue  conducted a                                                               
numerical  analysis to  understand how  the resident  hire rebate                                                               
would work.   She  drew attention  to slide  4 which  depicts the                                                               
bill's  structure  in terms  of  the  rebate amount  for  various                                                               
percentages of resident hire.   The rebate amount depicted is the                                                               
percent  reduction  of  the  total tax  bill  when  these  hiring                                                               
criteria are met.                                                                                                               
2:26:58 PM                                                                                                                    
CO-CHAIR JOHNSON stated  the rebate applies only to  the base tax                                                               
rate and does not include the progressivity tax or royalties.                                                                   
MS. DAVIS responded  that the department did  not understand this                                                               
and will have to rerun the numbers.                                                                                             
CO-CHAIR JOHNSON  offered to clarify  this in  the bill if  it is                                                               
not clear.                                                                                                                      
MS. DAVIS  said she will skip  [slide 5] until the  department is                                                               
able to  rerun the numbers.   She explained that the  slide takes                                                               
three different  companies of three different  sizes with roughly                                                               
three different  tax bills that  are aspiring to receive  the tax                                                               
rebate by  hiring more Alaskans.   The analysis was an  effort to                                                               
discern  the number  of employees  that  it would  take for  each                                                               
company to move  to the next rebate bracket and  what the cost to                                                               
the state  would be per  employee.  [Commissioner Galvin  and Ms.                                                               
Davis returned to slide 5 later in the meeting at 4:05:42 p.m.]                                                                 
2:28:24 PM                                                                                                                    
MS.  DAVIS   added  that  while  conducting   this  analysis  the                                                               
department  learned that  there  are two  ways  to approach  this                                                               
[slide 8].   The analysis  was done  with the assumption  that an                                                               
employer  would simply  keep  its  status quo  and  seek to  hire                                                               
Alaskans to  raise its  percentage of local  hire.   However, she                                                               
cautioned, there is  the possibility that an  employer could fire                                                               
nonresidents without  hiring any  new Alaskans and  thereby alter                                                               
its overall percent of Alaska hire.                                                                                             
CO-CHAIR JOHNSON replied he appreciates  that, but he is going to                                                               
operate under the assumption that  these are for-profit companies                                                               
and they are going to want  to have employees to generate revenue                                                               
to generate profits.   Thus, he cannot think that  they will fire                                                               
all of their non-Alaskan employees to get to 100 percent.                                                                       
MS. DAVIS pointed out that while  it might not make sense for big                                                               
moves, it  would make sense for  a company on the  bubble to fire                                                               
one or  two people to fall  into a bracket that  gets the company                                                               
$10 million or $20 million.                                                                                                     
CO-CHAIR  JOHNSON commented  that  when the  company hires  those                                                               
people back they will be Alaskans.                                                                                              
REPRESENTATIVE  TUCK referenced  the committee's  discussions [of                                                               
2/8/10]  regarding the  legality of  disparity between  residents                                                               
versus  nonresidents.   He pointed  out  that this  could end  up                                                               
being a  case that nonresidents  can fight to show  disparity and                                                               
he would hate to see something like that actually take place.                                                                   
CO-CHAIR JOHNSON  stated his belief  that that would  be recourse                                                               
against the company and not the state.                                                                                          
2:30:34 PM                                                                                                                    
COMMISSIONER GALVIN  reported that when conducting  the analysis,                                                               
the department discovered that Version  E's proposed structure of                                                               
tiers  based upon  a  percent  of resident  hire  will result  in                                                               
behavioral issues that are unique  to each taxpayer and that will                                                               
create inefficient  behavior.  Under  this proposed  structure of                                                               
tiers, the  addition of one or  two employees could mean  tens of                                                               
millions  of dollars  of additional  rebate.   Therefore, because                                                               
the  methodology  is  hours  worked,   a  for-profit  company  is                                                               
incentivized  to bring  in three  or  four people  to just  stand                                                               
around for minimum  wage and the company would then  get an extra                                                               
$10 million.   He said he is simply bringing  this outcome of the                                                               
proposed tiered structure to the sponsor's attention.                                                                           
CO-CHAIR  JOHNSON  responded  that   his  reason  for  the  small                                                               
increments is that  once a company gets from  80 percent resident                                                               
hire to 85 percent, he does not  want there to be such a big jump                                                               
to  the next  hurdle  that  the company  decides  to stop  hiring                                                               
Alaskans.  There needs to be  a balance somewhere.  He offered to                                                               
work with  the department  to correct the  problems, but  said he                                                               
does not  want to take away  the incentive for a  company to keep                                                               
hiring more Alaskans.   He would like companies to  strive for 95                                                               
or 100 percent and he wants to incentivize them with steps.                                                                     
2:32:23 PM                                                                                                                    
COMMISSIONER GALVIN suggested that  from a structural standpoint,                                                               
it may  make more  sense to  have a straight  line as  opposed to                                                               
tiers.    A  mechanism  could   be  established  where  for  each                                                               
additional Alaskan a company gets an incremental change in tax.                                                                 
CO-CHAIR  JOHNSON replied  he thought  about this,  but the  bill                                                               
drafter said it would be very difficult to write such a bill.                                                                   
2:33:19 PM                                                                                                                    
MS.  DAVIS noted  the department  has  completed its  regulations                                                               
defining what  labor costs  qualify as  lease expenditures.   She                                                               
said Mr. John Larsen will  share with members what the department                                                               
understands to  be the  labor costs that  would fall  within this                                                               
category of lease expenditures [slides 9-13].                                                                                   
JOHN LARSEN,  Audit Master, Tax Division-Production  Audit Group,                                                               
Department of  Revenue, explained that  there are two  classes of                                                               
allowable employee  expenses for  the operator  [slide 10].   The                                                               
first  class of  expenses is  employees that  are located  on the                                                               
site of  the oil or  gas exploration, development,  or production                                                               
operations,  including the  infrastructure for  those operations.                                                               
The  second class  of expenses  is employees  having special  and                                                               
specific  engineering,  geological,  or other  technical  skills.                                                               
These employees do  not need to be located onsite,  but the costs                                                               
of their labor  are limited to the handling  of specific problems                                                               
or operating conditions involving  the operations there, and only                                                               
the time  actually incurred working  on those problems.   Outside                                                               
of the  operator's labor would  be the contractor's  labor, which                                                               
is 100 percent deductible.                                                                                                      
2:35:07 PM                                                                                                                    
REPRESENTATIVE  SEATON   surmised  that   the  second   class  of                                                               
employees could be located anywhere, including other countries.                                                                 
MR.  LARSEN responded  right.   The  essential  criteria is  that                                                               
historically, prior  to electronic  telecommunications, it  was a                                                               
clear  cut distinction  that if  an employee  was on  a lease  or                                                               
property  the   employee  was  chargeable.     However,  the  new                                                               
technologies have  expanded the  lease boundary.   The department                                                               
realizes that there  are people who are employed  directly in the                                                               
operations but who  may not necessarily be directly  on the lease                                                               
site itself.   There is a  benefit for both the  operator and the                                                               
state to  recognize that there  is a  cost savings in  not having                                                               
technical labor onsite  of the lease, such as  savings in travel,                                                               
housing, and safety costs.                                                                                                      
REPRESENTATIVE  SEATON presumed  that  this includes  accountants                                                               
and others if they are  working on maintaining records for leases                                                               
in Alaska.                                                                                                                      
MR. LARSEN replied correct.                                                                                                     
2:37:04 PM                                                                                                                    
REPRESENTATIVE P. WILSON,  in regard to contract  labor being 100                                                               
percent deductible,  inquired as  to what is  normally contracted                                                               
out because  a producer  could contract  every single  thing that                                                               
there is.                                                                                                                       
MR.  LARSEN answered  that it  goes back  to the  assumption that                                                               
these  are  for-profit  companies.   They  are  also  working  in                                                               
conjunction  with   their  joint  operating  partners,   and  the                                                               
presumption  is  that they  will  not  make  a decision  that  is                                                               
contrary to all of their best financial interests there.                                                                        
COMMISSIONER GALVIN added the idea  is that the contract labor is                                                               
going to be  for services that the company needs  someone else to                                                               
do.   It is  presumed that  this takes the  place of  the company                                                               
hiring  someone  itself  and  having  that  person  do  the  same                                                               
service.   For  the department,  it really  is either/or  because                                                               
hopefully  the company  is finding  a  more efficient  contractor                                                               
than  what it  would  cost for  the company  to  pay this  person                                                               
itself.  Thus,  the state benefits from  the company's motivation                                                               
to bring in contractors where it  is more efficient to do so, and                                                               
the state  gives them 100 percent  of that cost.   He pointed out                                                               
that the state  also pays 100 percent of the  class one and class                                                               
two employee expenses, and contract  labor substitutes for one of                                                               
those two.                                                                                                                      
CO-CHAIR JOHNSON  surmised there  is nothing  at this  point that                                                               
says contract labor is Alaskans.                                                                                                
MS. DAVIS responded correct.                                                                                                    
MR. LARSEN also replied correct.                                                                                                
2:39:21 PM                                                                                                                    
REPRESENTATIVE TUCK posed  a scenario of an  Alaskan employee who                                                               
is  in the  state  of Washington  to oversee  the  building of  a                                                               
module.  He asked whether  the employer would receive a deduction                                                               
for that employee.                                                                                                              
MS.  DAVIS  answered   that  as  long  as   Alaska  remains  that                                                               
employee's state of domicile and it  is a temporary location on a                                                               
project  basis, the  department would  assume that  that employee                                                               
would still meet the criteria for defining Alaska resident.                                                                     
REPRESENTATIVE GUTTENBERG understood Ms.  Davis to be saying that                                                               
the construction of  modules outside of Alaska  would be included                                                               
in the definition.                                                                                                              
MS.  DAVIS  responded  that  the  department  would  actually  be                                                               
looking  at   each  individual  laborer,  and   in  the  scenario                                                               
presented  by Representative  Tuck the  employee was  the project                                                               
manager who had flown down  to Washington to oversee construction                                                               
of that particular project.                                                                                                     
COMMISSIONER   GALVIN  interpreted   Representative  Guttenberg's                                                               
question  to  be  whether  the  construction of  a  module  is  a                                                               
deductible  lease expenditure  under the  department's definition                                                               
of lease expenditures.                                                                                                          
MS. DAVIS deferred to Mr. Larsen.                                                                                               
MR.  LARSEN said  he believes  construction  of a  module in  the                                                               
state of Washington would be  considered a lease expenditure - as                                                               
long as it  is placed in service  [in Alaska].  If  the module is                                                               
not placed in  service, then he does not think  it would count as                                                               
a lease expenditure.                                                                                                            
2:41:27 PM                                                                                                                    
MR. LARSEN reviewed  examples of type one  allowable labor [slide                                                               
11].  Any employee working onsite  of the oil or gas exploration,                                                               
development, or  production operation  will be chargeable.   Such                                                               
employees   include:       drillers,   roughnecks,   roustabouts,                                                               
electricians,  plumbers,  pipefitters,  welders,  mechanics,  and                                                               
others  onsite.    These examples  pertain  to  the  exploration,                                                               
development,  or production  operations themselves.   Other  type                                                               
one  allowable labor  is employees  working in  infrastructure or                                                               
support operations  [slide 12].   This would include:   people in                                                               
the  camps  doing  housekeeping, janitorial,  and  food  service;                                                               
operations  centers  and  the  technicians  within  the  centers;                                                               
staging   pads,  road   bridges,  landing   areas,  and   similar                                                               
transportation structures  and therefore all  employees operating                                                               
graders  and   doing  road  maintenance;  employees   working  on                                                               
communications systems out in the  field in the support area, but                                                               
not employees working on communications  who go back to an office                                                               
outside  of  Alaska;  medical  facilities;  emergency  personnel;                                                               
security personnel; and security, repair, and maintenance shops.                                                                
MR. LARSEN,  in response  to Co-Chair  Johnson, clarified  that a                                                               
person   flying   up   to   Alaska    to   work   onsite   on   a                                                               
telecommunications system would be an allowable charge.                                                                         
2:44:32 PM                                                                                                                    
MR.  LARSEN highlighted  examples  of type  two allowable  labor,                                                               
which  is  employees  with   special  and  specific  engineering,                                                               
geological, or other  technical skills.  He  said these employees                                                               
would  be chargeable  whether  or not  they are  on  site of  the                                                               
operation.   Only  that  portion of  time  the employee  actually                                                               
devotes   to   the   exploration,  development,   or   production                                                               
operations is  chargeable.  These employees  include:  engineers,                                                               
such   as   reservoir   and  petroleum   engineers;   geologists;                                                               
environmental specialists because they  may have to do permitting                                                               
or archeological work in order  to be in compliance with permits;                                                               
employees  engaged in  field automation  systems,  such that  the                                                               
field could  be remotely  operated from  a distant  location; and                                                               
employees engaged  in computer applications that  are specific to                                                               
the   oil  or   gas  exploration,   development,  or   production                                                               
2:45:40 PM                                                                                                                    
REPRESENTATIVE   SEATON  asked   whether   an  accountant   could                                                               
determine not  to include a geologist  or other type one  or type                                                               
two  employee as  a  lease expenditure  and  instead apply  those                                                               
employees to the local hire tax rebate.                                                                                         
MR.  LARSEN replied  that the  lease expenditure  regulations are                                                               
ambivalent to  who the person is  and where the person  lives.  A                                                               
person's place of  residency has no bearing on whether  or not it                                                               
is a  lease expenditure and  is a  separate issue with  the bills                                                               
pending before the committee.                                                                                                   
COMMISSIONER GALVIN  added that  deducting a  particular employee                                                               
because the employee would qualify  as a lease expenditure is not                                                               
mandatory.   Under  Representative  Seaton's scenario,  employees                                                               
outside  of   Alaska  would,  under   the  definition   of  lease                                                               
expenditures,  actually  qualify  as  a lease  expenditure.    If                                                               
Version E were to pass in  a similar form, and adding an employee                                                               
to the calculation  [for lease expenditures] would  result in the                                                               
company  not  hitting  a  particular  threshold  and  enjoying  a                                                               
particular rebate,  then the  company could  choose not  to claim                                                               
the employee as a lease expenditure.                                                                                            
2:48:16 PM                                                                                                                    
COMMISSIONER GALVIN, in response  to Co-Chair Johnson, said local                                                               
hire  does have  to do  with  lease expenditure  because HB  308,                                                               
Version E,  defines it is the  total labor that falls  as a lease                                                               
expenditure.  He  explained that the department  is going through                                                               
this exercise  to show members what  is in the universe  of lease                                                               
expenditures.  If the legislation  were to break that and instead                                                               
say  it  is  all  labor  costs under  some  other  definition  of                                                               
connected to Alaska,  a whole different problem  would be created                                                               
because a  different definition  of what  is connected  to Alaska                                                               
would have  to made  in order  to define that  whole -  the whole                                                               
being  the  denominator  of  the  percentage  calculation.    The                                                               
department  recognizes the  need for  defining the  whole of  the                                                               
labor  costs  around  lease  expenditures  that  works,  but  the                                                               
department wanted  to make sure  the committee  understands where                                                               
the edges  are for that.   Regardless of how it  is defined, some                                                               
aspect  of voluntary  reporting  will always  be  faced, and  the                                                               
Department of  Revenue will work  with the Department of  Labor &                                                               
Workforce Development to confirm whether  all the parts that have                                                               
been included  are proper.   Realistically,  if something  is not                                                               
reported, DOR will  never know.  So, in  regard to Representative                                                               
Seaton's  question, that  is a  possibility, but  it goes  to the                                                               
question of  what is the  behavioral reaction to this  and making                                                               
sure that that is tightened down.                                                                                               
2:50:35 PM                                                                                                                    
REPRESENTATIVE  SEATON drew  attention to  page 6,  [lines 7-11],                                                               
Version E,  regarding the  labor costs  that are  allowable lease                                                               
expenditures, and  the entitlement to  a rebate if 80  percent or                                                               
more of  that labor  is done  by resident  workers.   The state's                                                               
normal consideration is  that the taxpayer will  get credited for                                                               
a laborer and get to  deduct the laborer's wage expenditures from                                                               
its taxes  as long as that  laborer is classified as  part of the                                                               
allowable  lease  expenditures.   He  is  concerned that  by  not                                                               
declaring non-Alaskans  as lease  expenditures or by  paying them                                                               
under the  table, a taxpayer  could save  5 percent on  its gross                                                               
taxes by saying it had a 100 percent Alaska resident workforce.                                                                 
CO-CHAIR JOHNSON allowed that that is a possibility.                                                                            
2:51:57 PM                                                                                                                    
MS. DAVIS  offered to run some  numbers in this regard.   As long                                                               
as this  credit does  not dominate  the value  to an  operator of                                                               
having that underlying  lease expenditure, then the  drive to get                                                               
the lease expenditure  should still dominate and  this tax credit                                                               
will hopefully be subordinated to that.                                                                                         
CO-CHAIR JOHNSON said he is hoping  the math works out that it is                                                               
better for the operator to hire the Alaskan than to cheat.                                                                      
COMMISSIONER GALVIN  quipped that the department  prefers to call                                                               
it tax avoidance as opposed to tax  evasion.  He noted that it is                                                               
a company's right to avoid taxes where legally possible.                                                                        
2:52:54 PM                                                                                                                    
REPRESENTATIVE P.  WILSON commented  that if  she were  a laborer                                                               
she  would not  want to  be paid  under the  table because  there                                                               
would  be no  protection supplied  by unemployment  insurance and                                                               
other benefits.                                                                                                                 
CO-CHAIR JOHNSON answered that he does  not think it is under the                                                               
table  that  is being  talked  about  but  rather being  off  the                                                               
records that  relate to the  tax structure  of Alaska.   In other                                                               
words, tax avoidance, not tax evasion.                                                                                          
The committee took an at-ease from 2:54 p.m. to 3:02 p.m.                                                                       
3:02:38 PM                                                                                                                    
MR. LARSEN related that prior  to ACES, overhead was considered a                                                               
direct cost.   However,  ACES made  a distinction  between direct                                                               
cost  and overhead,  and overhead  was changed  to being  a lease                                                               
expenditure  separate from  direct cost.    This is  not a  minor                                                               
distinction out in the oil field,  he advised.  He explained that                                                               
the previous portion  of his presentation regarding  type one and                                                               
two  labor referred  to the  direct charges  that operators  will                                                               
make pursuant to  operations.  The purpose of the  overhead is to                                                               
allow an operator to recover costs  that it incurs as operator of                                                               
the property that  are not recovered through  the direct charges.                                                               
The mechanism  used to do that  is overhead.  One  of the tenants                                                               
of overhead  in a joint  operating agreement is that  an operator                                                               
shall neither  profit nor incur cost  due to its position  as the                                                               
operator, so all  the working interest owners and  parties to the                                                               
agreement  have resolved  to make  the operator  whole for  these                                                               
types of costs.                                                                                                                 
MR.  LARSEN   explained  that  typically,  the   joint  operating                                                               
agreement  allows the  operator to  recover certain  indirect and                                                               
overhead costs incurred offsite  of the exploration, development,                                                               
or production operations  [slide 14].  This is because  if it was                                                               
an  onsite cost  it would  be recovered  as a  direct cost.   The                                                               
overhead costs are not directly  billed but recovered through the                                                               
overhead allowance.                                                                                                             
3:04:50 PM                                                                                                                    
REPRESENTATIVE SEATON understood that people  on the job would be                                                               
included in  the overhead  allowance and  would therefore  not be                                                               
individually reported  as a lease  expense because they  would be                                                               
covered in the overhead.                                                                                                        
MR. LARSEN  replied correct, their  costs are not  billed direct,                                                               
but are recovered through the overhead mechanism.                                                                               
3:05:21 PM                                                                                                                    
MS. DAVIS  explained that  the department  is discussing  this to                                                               
make it  clear that  overhead does  contain labor  costs.   It is                                                               
allowed  as  a lease  expenditure  and  therefore the  department                                                               
would read  Version E to include  the labor costs incurred  by an                                                               
operator that  are corporeal to  the operator's  overhead charge,                                                               
even  though it  is  an  indirect charge  and  does  not look  as                                                               
dominant or as obvious as the  direct charges for labor.  Typical                                                               
overhead  labor  includes  technical  supervisors,  drafting  and                                                               
engineering   aides,   accounting,    clerical,   certain   legal                                                               
activities   but  not   attorneys,  and   offsite  computer   and                                                               
communications  activities [slide  15].   These  are things  that                                                               
support  the  operator in  doing  its  job  and the  operator  is                                                               
allowed  to charge  the  costs  for it.    As currently  written,                                                               
Version E would cover all of  those labor costs and this is being                                                               
flagged in case that is not the intent of the committee.                                                                        
CO-CHAIR  JOHNSON  responded  that  he   wants  to  look  at  the                                                               
advantages and disadvantages of doing  this.  He wants to include                                                               
as many  people as  possible in the  formula that  pushes Alaskan                                                               
jobs, although there may be some  point at which that needs to be                                                               
cut off because it does not make sense.                                                                                         
3:07:11 PM                                                                                                                    
MS. DAVIS  asked Mr. Larsen  whether overhead labor  is generally                                                               
the people  who are  working out of  the headquarters  office and                                                               
would that office be located in Alaska.                                                                                         
MR. LARSEN  replied that  care must be  taken when  talking about                                                               
overhead because in general it  is not specific jobs or functions                                                               
that are  being talked  about; rather,  it is  a kind  of general                                                               
allowance meant  to cover a  category of costs that  are incurred                                                               
by the  operator.  Specifically identifying  those individuals is                                                               
therefore an area where he would want to tread pretty lightly.                                                                  
REPRESENTATIVE GUTTENBERG  inquired whether Ms.  Davis's question                                                               
was  about including  in the  bill  the accountant  who spends  a                                                               
portion of his  or her time doing the calculations  for the North                                                               
MS. DAVIS answered yes.                                                                                                         
3:09:15 PM                                                                                                                    
REPRESENTATIVE SEATON presumed the rebate would be by taxpayer.                                                                 
MS. DAVIS agreed.                                                                                                               
REPRESENTATIVE  SEATON   asked  whether   there  are   any  large                                                               
taxpayers  that  do  not  operate   any  fields  and  that  would                                                               
therefore   have  few   employees  and   a  high   resident  hire                                                               
percentage, or does Version E look  at the field and divvy up the                                                               
number of  employees on  the field based  upon the  percentage of                                                               
ownership of that field?                                                                                                        
MS. DAVIS responded  that DOR would look at the  cost reported on                                                               
each  taxpayer's tax  return.   Each  taxpayer  gets allocated  a                                                               
share of the lease expenditure for  each field in which it has an                                                               
ownership interest.   For example,  a taxpayer owning  20 percent                                                               
of  Prudhoe  Bay would  be  charged  20  percent of  those  lease                                                               
expenditure costs and that would  be reflected in the tax return.                                                               
Those costs are  offset against the taxpayer's  revenue to arrive                                                               
at  the  tax  value  from  which the  tax  is  calculated.    The                                                               
department  would   consider  that  taxpayer,  as   it  does  the                                                               
operator,  an  employer  of  those people.    So,  every  working                                                               
interest owner on  the North Slope would be considered  to have a                                                               
share of  these labor  costs and  therefore have  a share  of the                                                               
rebate.   The  taxpayer is  driven  by the  operator because  the                                                               
operator controls who gets hired and who is doing what.                                                                         
3:11:19 PM                                                                                                                    
COMMISSIONER GALVIN  added that all  of this revolves  around the                                                               
word "incur" and whether the  taxpayer "incurs labor costs" [page                                                               
6, line  9, Version E].   The department is interpreting  this to                                                               
mean  that if  a  taxpayer  is charged  for  labor  costs it  has                                                               
incurred those  costs, regardless of  whether the charge  is from                                                               
the operator  of the  field in  which the  taxpayer is  a working                                                               
interest  owner  or  from  a contractor  hired  directly  by  the                                                               
taxpayer.  Initially, it is  the operator that incurs 100 percent                                                               
of the labor cost.  That  operator will have a certain percentage                                                               
of Alaskans that it hires.   The operator will then divvy up that                                                               
cost among  the working interest  owners according  to percentage                                                               
of ownership.   Each working interest owner  will then ultimately                                                               
incur  its portion  of that  labor cost  with that  percentage of                                                               
Alaska hire.   A taxpayer that  is the operator of  one field and                                                               
the  working interest  owner  of another  field  has more  direct                                                               
control over  the percentage  of resident  hire allocated  in the                                                               
field it is operating,  but will be a "rider in  the car" for the                                                               
other field.   A blend of the two will  ultimately determine that                                                               
taxpayer's qualification for this rebate.                                                                                       
3:13:22 PM                                                                                                                    
COMMISSIONER  GALVIN,  in   further  response  to  Representative                                                               
Seaton, pointed out  that the unit of measure under  Version E is                                                               
hours.    Therefore, the  percentage  for  each working  interest                                                               
owner would  be based upon the  total number of hours  worked for                                                               
the whole field  for the year.   A 20 percent owner  would get 20                                                               
percent of the  total hours worked - both the  total hours worked                                                               
and  the  total Alaska  hours.    If  that field  dominates  that                                                               
taxpayer's Alaska portfolio, it may  not matter too much what the                                                               
taxpayer's  other ownerships  are because  the taxpayer  will get                                                               
that  80  percent  as  a   significant  portion  of  its  overall                                                               
calculation.  He posed another scenario  in which a taxpayer is a                                                               
working interest  owner of  a field with  80 percent  Alaska hire                                                               
and the  operator of another  field with 70 percent  Alaska hire.                                                               
In this  case, the taxpayer  would be knocked  from qualification                                                               
for the  first tier because  the blend  of the two  fields brings                                                               
the taxpayer below 80 percent.   However, if the working interest                                                               
partner of  that field has no  other operations in the  state, it                                                               
would  get the  rebate.    The rebate  is  taxpayer specific  and                                                               
depends upon  each taxpayer's portfolio  and the number  of hours                                                               
being  worked   for  the  various   fields  and   the  individual                                                               
taxpayer's share of those hours.                                                                                                
3:15:48 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired whether the department  would use                                                               
a formula of some kind for salaried workers.                                                                                    
MS.  DAVIS deferred  the question  to the  Department of  Labor &                                                               
Workforce Development.  However, she  guessed that DLWD could use                                                               
a  little  more  guidance.    The problem  with  people  who  are                                                               
salaried is  that they could  in actuality  work 20 hours  a day,                                                               
rather than 8 hours, and  therefore guidance from the legislature                                                               
would be helpful in what to do in that kind of instance.                                                                        
3:17:00 PM                                                                                                                    
MR. LARSEN  resumed his presentation  and began  discussion about                                                               
non-deductible  lease  expenditures for  labor  [slide  16].   He                                                               
acknowledged that  some types  of labor  are included  under both                                                               
overhead and non-deductible  and that he may have  been remiss to                                                               
have  identified  specific jobs  or  people  associated with  the                                                               
overhead,  specifically  the legal  and  accounting  people.   In                                                               
regard to  labor that is  not an allowable lease  expenditure, he                                                               
provided the  following examples:  tax;  legal; accounting; labor                                                               
expenses  that are  for the  benefit of  an individual  lessee or                                                               
producer only, and  not necessarily for the benefit  of the joint                                                               
operations or  production; and community, public,  and government                                                               
MR. LARSEN explained  that no two joint  operating agreements are                                                               
alike, and  some may have  an election where a  partner indicates                                                               
that certain  classes of cost  shall constitute a  direct expense                                                               
or shall  be included in the  overhead rate.  Depending  upon the                                                               
election, the  overhead rate is  adjusted accordingly.   Examples                                                               
of  those  classes  of  costs  would  include  certain  types  of                                                               
technical labor,  such as the  computer and the  lease operations                                                               
application   for   remote    technologies,   and   legal   costs                                                               
specifically for  perfecting the  lease or protecting  an owner's                                                               
interest in the  lease.  The accounting necessary  for paying the                                                               
people  that are  up there  would  be covered  as a  part of  the                                                               
overhead rate, but  the rest of the day-to-day  operations of the                                                               
accounting  function  for  the  operator's  or  producer's  other                                                               
employees would not be covered by the overhead rate.                                                                            
3:19:53 PM                                                                                                                    
MR. LARSEN  elaborated further  in regard  to the  labor expenses                                                               
that are  for the benefit of  the joint operations.   He said the                                                               
lease expenditures  are allowed  for the  operator, which  is the                                                               
company that  actually runs the lease.   It is the  operator, not                                                               
the working interest  owners, that is involved  in the day-to-day                                                               
operations and in determining who is  employed on the lease.  The                                                               
working interest  owners then pay  their share of  the operator's                                                               
costs  for  those  employees.     The  individual  geologists  or                                                               
engineers who are looking out  specifically for the interest of a                                                               
company are  not chargeable as  a lease expenditure  because they                                                               
are  not involved  in the  day-to-day  production operations  and                                                               
this is a production tax that is being talked about.                                                                            
3:21:08 PM                                                                                                                    
MR. LARSEN,  in response to Representative  Guttenberg, confirmed                                                               
that the sole owner  of a lease is the operator  of the lease and                                                               
would  therefore  qualify for  those  expenditures.   In  further                                                               
response, he  said the department's regulations  apply whether it                                                               
is an operator that has  other parties as working interest owners                                                               
or an operator that is the sole party of interest in the field.                                                                 
3:22:06 PM                                                                                                                    
MS. DAVIS,  in response to Representative  Seaton, explained that                                                               
an operator  will nearly  always represent all  of the  owners in                                                               
the relationship to contractors and  others, so the operator will                                                               
incur  the legal  obligation and  be responsible  for paying  the                                                               
entire bill.  The operator then  bills out the costs to the other                                                               
parties to be  reimbursed.  There may be a  rare instance where a                                                               
very  small  operator  cannot  afford  to take  the  hit  so  the                                                               
operator allocates the  bill; however, that is very  unusual.  In                                                               
further  response, she  clarified  that once  a working  interest                                                               
owner pays  its share of  the billed  costs to the  operator, the                                                               
owner incurs  that cost and  that cost becomes the  owner's legal                                                               
lease expenditure  that can be  reported against the  owner's tax                                                               
3:24:24 PM                                                                                                                    
REPRESENTATIVE OLSON,  in regard to  when a  CS for Version  E is                                                               
done,  asked whether  it would  be  easier to  take the  original                                                               
version of ACES and put the local hire provision into that.                                                                     
COMMISSIONER  GALVIN responded  no, because  then there  would be                                                               
two  different  universes  of  lease  expenditure  and  both  the                                                               
taxpayer  and the  state would  have to  simultaneously have  two                                                               
different definitions and that would  create a significant burden                                                               
for  both.   In further  response, he  said the  base tax  in the                                                               
original version  of ACES was  25 percent, the  progressivity was                                                               
0.2 percent, and there was a gross tax floor.                                                                                   
3:25:53 PM                                                                                                                    
REPRESENTATIVE SEATON inquired whether it  would be a lot cleaner                                                               
to have  the state give  a rebate  of $20,000 for  every employee                                                               
above a specified  percent that is hired into the  company.  Then                                                               
it  would  be a  known  amount  and  it  would be  a  significant                                                               
incentive  for actual  hiring of  Alaskans without  going through                                                               
complex calculations and regulatory procedures.                                                                                 
CO-CHAIR JOHNSON replied  that Representative Seaton's suggestion                                                               
would not be optional and would  make Alaskans on a different par                                                               
than nonresidents  and would not  stand muster.  Version  E makes                                                               
it optional.  However, he said he will take a look at it.                                                                       
REPRESENTATIVE SEATON added that his  suggestion could be made an                                                               
optional credit that a taxpayer could choose to apply for.                                                                      
CO-CHAIR  JOHNSON  answered  that  the local  hire  provision  in                                                               
Version E was modeled a little  bit after the film credit because                                                               
that credit has withstood some  time, although there has not been                                                               
a legal challenge to it.                                                                                                        
3:27:58 PM                                                                                                                    
MS. DAVIS  returned to the  Department of  Revenue's presentation                                                               
to  discuss the  progressivity rate  change proposed  by HB  308,                                                               
Version  E.   She  called  attention to  slide  18 depicting  the                                                               
nominal  tax rates  currently  in effect  under  ACES, and  which                                                               
include  the   [25  percent]  base   tax  and  the   0.4  percent                                                               
[progressivity] that goes  up to 0.1 percent [after  a 50 percent                                                               
production tax  rate is  reached].  Under  the nominal  tax rates                                                               
proposed by Version  E, the progressivity kickoff  point would be                                                               
similar but  the progressivity  would be 0.2  percent up  to $155                                                               
per  barrel production  tax value  [slide 19].   For  comparison,                                                               
slide 20 is an overlay of the two aforementioned charts.                                                                        
MS. DAVIS  specified that  the change in  state revenue  from the                                                               
[proposed change  in progressivity]  is what  is relevant  to the                                                               
Department of  Revenue.   The department  asked the  question, If                                                               
the state does not have the  revenue, who does?  Slide 21 depicts                                                               
the answer  under three different  scenarios of oil prices.   The                                                               
key point is  that when the state  gives up revenue, it  is not a                                                               
purely efficient transfer to the  contractors because the federal                                                               
government captures a  chunk.  Once the annual  average oil price                                                               
reaches $76 per  barrel and progressivity starts  to take effect,                                                               
money would  begin shifting to  the federal government.   At $100                                                               
per barrel a sizeable amount of  money would shift to the federal                                                               
government.   Thus,  as  progressivity starts  to  play a  bigger                                                               
role, money  would shift to  the federal government.   The direct                                                               
money transfer  that Representative  Seaton was  describing might                                                               
have some linkage to the federal tax as well.                                                                                   
3:29:54 PM                                                                                                                    
MS. DAVIS, in regard to  the retroactive interest waiver proposed                                                               
by  Version  E,   explained  that  DOR  can   waive  the  penalty                                                               
associated with an amended or revised  tax bill that is caused by                                                               
a  change   or  by  retroactive  application   of  a  regulation.                                                               
However, the department does not  have the statutory authority to                                                               
waive the  interest that  would accrue.   So,  when asked  by the                                                               
governor  what   the  department   would  see  as   an  important                                                               
improvement  to   ACES,  the  department  recommended   that  the                                                               
interest  not   begin  until  a   reasonable  period   after  the                                                               
regulation is  put in  place.  Under  the proposed  provisions of                                                               
Version E, underpayment would not  be considered delinquent until                                                               
after 30 days  from the effective date of the  regulation.  Under                                                               
the  proposed provisions  of Governor  Parnell's  bill [HB  337],                                                               
interest for  underpayment would be  waived before the  first day                                                               
of the second  month following the month in  which the regulation                                                               
became effective;  thus it  could be  as low as  31 days,  but as                                                               
high as  60 days.  It  is a matter  of making sure that  both the                                                               
department and the taxpayer have enough time to react.                                                                          
3:30:59 PM                                                                                                                    
MS.  DAVIS addressed  the proposed  change in  interest rate  for                                                               
interest  the  state  would  owe  the  taxpayer  when  taxes  are                                                               
overpaid  [slide  24].    She  asked  members  to  disregard  the                                                               
typographical error at  the bottom of the page  which states that                                                               
Version E  changes the  long-standing rule  that interest  is not                                                               
allowed if an  overpayment is refunded within 90  days; Version E                                                               
would not  change this rule.   The place  where Version E  adds a                                                               
unique factor  is the change  in the  interest rate itself.   The                                                               
department looked  into this and  learned that the  interest rate                                                               
was raised [in  1991] because interest rates were  much higher at                                                               
that time.   Additionally,  there was  a view  at that  time that                                                               
taxpayers  were essentially  using the  state as  the bank  so to                                                               
speak.  So,  there needed to be a high  enough interest rate that                                                               
taxpayers  would be  incentivized to  go ahead  and pay  disputed                                                               
amounts.   For example,  the state  might earn  5 percent  on the                                                               
difference, but a company might be  able to make 10-15 percent on                                                               
the money  that it kept in  its pocket.  From  a revenue forecast                                                               
and flow  point of view,  DOR believes it  is easier to  not make                                                               
the state the  bank and that is why Governor  Parnell's bill does                                                               
not propose to change the interest rate.                                                                                        
CO-CHAIR JOHNSON stated that Version  E is modeled after what the                                                               
Internal Revenue Service does.                                                                                                  
3:32:34 PM                                                                                                                    
MS.  DAVIS spoke  to  the  proposed provision  for  a 30  percent                                                               
credit  for  well-related  expenditures  [slide 26].    [HB  308,                                                               
Version E,  would provide this  credit by amending  AS 43.55.023;                                                               
the governor's  bill would amend  AS 43.55.025.]  She  noted that                                                               
that there  is a  gap in  the statutes for  well credits.   Wells                                                               
that are  less than three  miles out  do not qualify  for credits                                                               
under  AS  43.55.025, and  AS  43.55.023  provides a  20  percent                                                               
credit only for qualified capital  expenditures.  When working on                                                               
the governor's  bill, the department's  goal was to find  a place                                                               
for a 30  percent credit on well work that  would yield immediate                                                               
production  benefits.   Capital  expenses needed  to  go from  20                                                               
percent to 30 percent and operating  expenses needed to go from 0                                                               
percent to 30  percent.  Therefore, the governor's  bill puts the                                                               
proposed 30 percent  well credit under AS  43.55.025 because that                                                               
statute covers both capital and  operating expenses.  Also, it is                                                               
important  to share  information with  the Department  of Natural                                                               
Resources  (DNR)   and  an  information-sharing   requirement  is                                                               
already provided by  AS 43.55.025.  Additionally,  to correct the                                                               
inequity  when an  explorer is  less  than three  miles out,  the                                                               
governor's bill proposes to collapse  and meld the three-mile and                                                               
in-field  expenses in  a  rewrite  of AS  43.55.025.   Thus,  the                                                               
department approached the  same problem as did the  sponsor of HB
308  and got  much  the  same result.    However, the  department                                                               
believes that administratively the  proposed credit for well work                                                               
might be  cleaner in  AS 43.55.025  and therefore  recommends the                                                               
committee look at that statute for HB 308.                                                                                      
3:34:42 PM                                                                                                                    
CO-CHAIR  JOHNSON  said  AS 43.55.023  only  deals  with  capital                                                               
expenditures.   He surmised  that if  both capital  and operating                                                               
expenditures  are credited  it will  be  more money  that can  be                                                               
MS. DAVIS  responded that when  DOR read  HB 308, it  was unclear                                                               
that  the credit  was being  limited  to capital  costs, and  the                                                               
department  thought  the sponsor's  intent  was  to pick  up  the                                                               
capital and operating expenses.                                                                                                 
CO-CHAIR JOHNSON  stated that it was,  by the nature of  it being                                                               
in AS  43.55.023.  He presumed  the effect would be  the same; it                                                               
is just where it is placed in the statute.                                                                                      
MS. DAVIS agreed that it is.                                                                                                    
COMMISSIONER  GALVIN  pointed  out   that  AS  43.55.023  defines                                                               
capital  credits.    To  get  the well  work  that  is  currently                                                               
considered to  be an  operating credit, not  a capital  credit, a                                                               
portion of  AS 43.55.023 would  have to  be carved out  that says                                                               
that  for this  category AS  43.55.023 is  broader.   It is  this                                                               
amalgam  within  the  AS  43.55.023 credit  that  becomes  a  bit                                                               
problematic because  this extra concept  is attached to  the side                                                               
of  it.   When dealing  with  this same  problem, the  department                                                               
found that AS 43.55.025 provided  a cleaner way of expanding that                                                               
3:36:22 PM                                                                                                                    
REPRESENTATIVE SEATON  pointed out that with  in-field work there                                                               
is no  risk because  it is  known that  the pool  is there.   The                                                               
trade-off was that the further  the step-out, the more risk, thus                                                               
the more  credits that  are needed.   Now,  it is  being proposed                                                               
that  there  be  30  percent capital  and  30  percent  operating                                                               
credits.    In  addition,  the  25  percent  base  rate  and  the                                                               
progressivity   will  be   deductible  since   these  are   lease                                                               
expenditures.  He expressed his  concern that the state could end                                                               
up paying more than 100 percent of these non-risky investments.                                                                 
3:38:19 PM                                                                                                                    
COMMISSIONER GALVIN  replied that AS 43.55.025  credits cannot be                                                               
added to  AS 43.55.023  credits; they  are mutually  exclusive of                                                               
each  other   and  a   company  cannot   receive  both.     Under                                                               
Representative Seaton's  scenario, the  state would provide  a 30                                                               
percent credit for well work and  the company would get to deduct                                                               
that cost  and the 25  percent plus  progressivity.  But  that is                                                               
where it would stop because it is one system or the other.                                                                      
COMMISSIONER  GALVIN,  in  regard   to  incentivizing  risky  and                                                               
economically  challenged  projects   versus  less  risky  in-fill                                                               
drilling,  said  he is  not  suggesting  that  this now  be  seen                                                               
differently.  Rather,  he is recognizing is that  there is within                                                               
a field  a spectrum of  potential projects that could  be pursued                                                               
and  those  projects  are  going   to  have  different  economics                                                               
depending upon what  the expected cost is to reward.   He allowed                                                               
that there  will likely  be projects that  will qualify  for this                                                               
credit that  would have proceeded  without the credit.   However,                                                               
the intent of the governor's  proposal, which he thinks is shared                                                               
by Co-Chair Johnson's proposal in HB  308, is that there are also                                                               
likely to be a suite of  projects that this credit will kick over                                                               
the threshold  from no-go to  go, and those  are the ones  DOR is                                                               
trying  to  target.    The  department  feels  this  tradeoff  is                                                               
appropriate given that  at the end of the day  a company is going                                                               
to have to actually spend money to earn these credits.                                                                          
CO-CHAIR  JOHNSON said  he  remembers  the step-out  differently.                                                               
Yes, the  step-out was more  risky, but it  was also new  oil for                                                               
the Trans-Alaska Pipeline  System.  However, it is  his view that                                                               
anything that accomplishes  that goal, whether it  is three miles                                                               
out or in the existing field,  is eligible for those credits.  If                                                               
it puts oil  down the pipeline, that is what  the state is after.                                                               
It is not necessarily the risk, but  the oil that is put down the                                                               
3:42:05 PM                                                                                                                    
REPRESENTATIVE SEATON  requested that  the department  provide an                                                               
analysis  of what  the state's  participation would  be at  these                                                               
higher credit lines for in-field,  no-risk projects under various                                                               
oil price scenarios.                                                                                                            
COMMISSIONER GALVIN agreed to do so.                                                                                            
CO-CHAIR JOHNSON cautioned  against using the term no  risk.  Any                                                               
time a  drill rig is  set up there  is a  risk, it just  might be                                                               
less risk.                                                                                                                      
3:43:14 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG commented  that  some  of the  re-work                                                               
activities  only require  a small  crew,  not setting  up a  full                                                               
drilling rig.   He  agreed that  some of  these things  would get                                                               
done anyway because  it is in the company's  economic interest to                                                               
so, regardless of  tax credits or other incentives.   He inquired                                                               
whether there is  a way to separate these out  and make this only                                                               
for those that need an incentive.                                                                                               
CO-CHAIR JOHNSON responded that this  is not what is being talked                                                               
about  here, but  Representative Guttenberg  would be  welcome to                                                               
introduce such a bill.  If  it were the case that companies would                                                               
do  it anyway,  then the  companies would  be doing  it, but  the                                                               
companies are  not despite an oil  price of $70 per  barrel.  The                                                               
question is why not.                                                                                                            
REPRESENTATIVE  GUTTENBERG said  he  is not  sure  that is  true.                                                               
Companies have  a lot  of these  things on  schedule and  that is                                                               
what he is talking about.   Things that are on a company's normal                                                               
maintenance schedule, such as re-logging, re-cracking, re-                                                                      
casing, are being done anyway.                                                                                                  
CO-CHAIR JOHNSON replied that the  committee will be hearing from                                                               
the producers in this regard.                                                                                                   
3:45:36 PM                                                                                                                    
MS.  DAVIS drew  attention  to  a section  of  the proposed  well                                                               
credit in HB 308, Version E,  that defines what is a well-related                                                               
expenditure:   up to the flange  and connecting the well  head to                                                               
the well  line [slide 26].   She  said the department  is unclear                                                               
whether  this modifier  references only  the intangible  drilling                                                               
and development  costs or also reaches  up and is a  qualifier on                                                               
the other listed well-related activities.                                                                                       
CO-CHAIR  JOHNSON  answered  that   the  intention  is  the  well                                                               
activity and  not beyond the  well, so it  is setting the  rig up                                                               
and  not the  pipeline  or other  things that  might  need to  be                                                               
redone.  It is strictly the well workover expenditure.                                                                          
MS. DAVIS added  that the department was thrown off  by the well-                                                               
related  seismic work  that is  included in  the provision.   She                                                               
suggested that some drafting finesse be done to clarify that.                                                                   
3:46:38 PM                                                                                                                    
MS. DAVIS  reviewed the last  change proposed by HB  308, Version                                                               
E,  which  is  the  change  in the  statute  of  limitations  for                                                               
production  tax  assessments.    She  began  this  discussion  by                                                               
reviewing the  department's current  production tax  audit status                                                               
[slide 28]:   eight production profits tax  (PPT)/ACES audits are                                                               
in  progress for  the time  period of  April-December 2006,  with                                                               
completion  of  these  audits  estimated  to  be  3/31/2010;  two                                                               
PPT/ACES  audits  pending  from  the  year  2006  which  will  be                                                               
completed after 3/31/2010; one economic  limit factor (ELF) audit                                                               
in process from  the 2003, 2004, 2005 time period  [which will be                                                               
completed  after 6/30/2010];  and  three credit  audits for  2006                                                               
[with estimated  completion by 3/31/2010].   She noted that  as a                                                               
result of  ACES, the department  must also now do  credit audits,                                                               
and out of  the department's eleven auditors,  four are dedicated                                                               
full-time  to just  auditing  credits.   Six  auditors, and  soon                                                               
seven,  are focused  on production  tax returns.   There  are two                                                               
empty auditor positions.                                                                                                        
3:47:59 PM                                                                                                                    
CO-CHAIR NEUMAN inquired whether  audits generally result in more                                                               
money coming in to the state or the state owing money.                                                                          
MS. DAVIS  responded that  generally most  audits result  in some                                                               
increase in tax payments to the state.                                                                                          
CO-CHAIR NEUMAN asked where that money would be seen.                                                                           
MS.  DAVIS  said  she  believes money  received  from  audit  and                                                               
resolution  settlements  goes   into  the  Constitutional  Budget                                                               
Reserve (CBR).                                                                                                                  
CO-CHAIR NEUMAN presumed  the funds would come out of  the CBR if                                                               
the state owed a taxpayer money after an audit.                                                                                 
COMMISSIONER GALVIN answered  that he is not aware  of many times                                                               
when an audit resulted in  a repayment; usually a taxpayer pushes                                                               
the definition  to its  advantage.   If there  is a  necessity to                                                               
repay  a  taxpayer, it  would  have  to  be appropriated  by  the                                                               
legislature as that  is not something the department  would do on                                                               
its own.                                                                                                                        
3:50:02 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  noted that the  legislature previously                                                               
authorized the Department  of Revenue to hire more  auditors at a                                                               
premium salary  range.  He  inquired whether more  auditors would                                                               
allow the department to decrease  the audit time [from six years]                                                               
to three years.                                                                                                                 
MS.  DAVIS  responded  that  the  authorization  was  for  master                                                               
auditors and  that by statute those  individuals supervise audits                                                               
as opposed  to doing audits.   The  department has what  it needs                                                               
for master auditors,  but needs "worker bees."   The challenge is                                                               
being  able  to  attract  qualified auditors  with  oil  and  gas                                                               
experience that can step in  and immediately do these high level,                                                               
complicated audits.   Generally, what the  department can attract                                                               
is  beginning  level individuals  who  must  be trained;  so  the                                                               
department is using the credit audits as the training ground.                                                                   
3:51:33 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG noted  that  slide 28  shows that  the                                                               
audits for  all taxpayers for  the years  2007 and 2008  have not                                                               
yet been started.  He surmised  that a taxpayer submits its taxes                                                               
for  the previous  year and  something  triggers an  audit or  an                                                               
audit is just done automatically.   He inquired whether it is the                                                               
department's  time  that  is  delaying  this  or  the  department                                                               
waiting for industry responses.                                                                                                 
MS.  DAVIS  replied that  it  is  a  combination  of both.    The                                                               
department gets after the immediate  ones, such as the older ones                                                               
where  the time  limit is  coming  up.   But, by  and large,  the                                                               
department is  driven by information gathering.   The information                                                               
that is required to do an  audit under ACES is substantially more                                                               
expansive than it is for the tax  type under ELF [slide 29].  For                                                               
example, additional information required  by ACES includes all of                                                               
the  lease  expenditures,  joint operating  agreements,  tracking                                                               
overhead charges,  and all  of the various  credits that  must be                                                               
rolled up  to apply against  the tax bill.   Audits are  now much                                                               
more work  than they were under  ELF, and that is  the reason why                                                               
ACES extended the statute of  limitation from three years to six.                                                               
If  the statute  of limitation  is  returned to  three years,  as                                                               
proposed by  HB 308, Version  E, the department  would definitely                                                               
require  additional  oil and  gas  tax  auditors  to be  able  to                                                               
complete the work in that timeframe.                                                                                            
MS.  DAVIS  returned  to  Representative  Guttenberg's  question,                                                               
saying  that it  is  an almost  equal  combination of  department                                                               
staff  and the  taxpayers needing  to  pull together  all of  the                                                               
aforementioned  information for  the  audit.   The department  is                                                               
very driven to  stay within that two- to  three-year timeframe of                                                               
staleness  because   the  department  recognizes  it   costs  the                                                               
taxpayers money  to keep the  records around.  However,  once the                                                               
department has  the information,  it takes  awhile to  digest and                                                               
analyze  it and  have  discussions with  the  taxpayer, and  this                                                               
takes the  department from the three  years to the four  and five                                                               
year timeframe to conclude a tax audit.                                                                                         
3:54:28 PM                                                                                                                    
MS.  DAVIS, in  further  response  to Representative  Guttenberg,                                                               
explained that the proposed change  in the statute of limitations                                                               
requires the  department to conclude  an audit within  the three-                                                               
year timeframe,  not begin the  audit, because at  the conclusion                                                               
of  the audit  is when  the  assessment is  made as  to what  the                                                               
department  believes  the   tax  bill  truly  should   be.    The                                                               
department would be forced to  scramble because it could not risk                                                               
loss of  value to the state  and would essentially shift  what is                                                               
now  a mostly  cooperative environment  with the  taxpayers to  a                                                               
confrontational  one.   More  hearing  officers  would likely  be                                                               
needed and there  would likely be more  litigation accompanied by                                                               
litigation costs.                                                                                                               
3:55:48 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  asked what  the average audit  time is                                                               
right now.                                                                                                                      
GARY ROGERS, Oil & Gas Revenue Specialist, Tax Division-                                                                        
Administration, Department  of Revenue (DOR), answered  that once                                                               
an auditor has all of the information  it can take a year or more                                                               
to do.  It  takes a long time to get  the information, digest it,                                                               
process  it,   re-run  calculations,   discuss  those   with  the                                                               
taxpayer, and  go back and forth  to get more information.   This                                                               
is why it takes years to do these audits.                                                                                       
JONATHAN   IVERSEN,    Director,   Tax   Division-Administration,                                                               
Department of  Revenue, agreed with  Mr. Rogers.  He  pointed out                                                               
that on slide  29 it can be  seen that the number  of bullets for                                                               
information required under ACES is  double that of ELF.  However,                                                               
those  bullets represent  three  to five  times more  information                                                               
that is required under ACES than  under ELF.  The ELF audits took                                                               
roughly 3  years to do and  were being done by  people with 15-20                                                               
years of experience.   Today, by and large, the  department has a                                                               
very inexperienced staff due to retirement.                                                                                     
3:58:30 PM                                                                                                                    
REPRESENTATIVE P.  WILSON presumed  that DOR  is not  getting the                                                               
information back from the taxpayers soon enough.                                                                                
MS. DAVIS  allowed that this is  one of her concerns.   Right now                                                               
the department's  entire tax  system is  manual.   The department                                                               
has endeavored to have on-line filing  and a 56-page tax form has                                                               
gone out  to the taxpayers to  use next year.   The oil companies                                                               
are struggling  to interface with the  state's antiquated system.                                                               
The tax form  is a Microsoft Excel spreadsheet and  when it comes                                                               
back the auditors will have to  search through it to find things.                                                               
There  is  nothing  automated  that  will  kick  out  capital  or                                                               
operating  expenditures or  credits.   It does  not flow  easily.                                                               
Having  an  automated  system would  help  with  the  information                                                               
sharing and would  be a key part.  The  department must launch an                                                               
audit within two  years so it can  begin to get data  while it is                                                               
fresh  and have  ample time  to  exchange it  with the  taxpayer.                                                               
Some of the  information is lying outside of  Alaska in locations                                                               
where  the companies  have centralized  their accounting  and tax                                                               
4:00:15 PM                                                                                                                    
REPRESENTATIVE P.  WILSON inquired  how much an  automated system                                                               
would cost.                                                                                                                     
MS. DAVIS  responded that  it was in  a prior  year appropriation                                                               
and at that time it was  about $30-$35 million to automate all of                                                               
the tax types  so that fisheries and all the  other folk would be                                                               
able to have on-line filing and  interface with the systems.  The                                                               
governor's  budget  this  year  has $300,000  to  study  how  the                                                               
department  would go  about  getting an  automated  system.   She                                                               
pointed out  that DNR has six  years to do audits  on the royalty                                                               
side,  and  the  set  of  information that  DNR  must  review  is                                                               
substantially  less  than that  for  the  Department of  Revenue.                                                               
Therefore,  DOR   is  happy  to   have  a  six-year   statute  of                                                               
4:01:37 PM                                                                                                                    
CO-CHAIR JOHNSON  said a reliable  computer system  is reasonable                                                               
for  the department  that is  responsible for  85 percent  of the                                                               
state's budget.  He asked whether DOR audits everyone.                                                                          
MS. DAVIS replied no.                                                                                                           
CO-CHAIR  JOHNSON  surmised  it  is  like  the  Internal  Revenue                                                               
Service and there is a formula that Ms. Davis cannot share.                                                                     
MS. DAVIS answered that that is probably accurate.                                                                              
CO-CHAIR  JOHNSON  inquired  whether  Ms.  Davis  can  state  the                                                               
percentage that is audited.                                                                                                     
MS. DAVIS  responded that  it depends upon  the tax  type because                                                               
the department is  trying to ensure that the lion's  share of the                                                               
revenue coming in is accurate.                                                                                                  
4:02:34 PM                                                                                                                    
CO-CHAIR JOHNSON  asked why  everyone is  not audited  given that                                                               
audits result in more money.                                                                                                    
MS. DAVIS replied that DOR does not have the staff to do that.                                                                  
CO-CHAIR JOHNSON  inquired whether  it would  make sense  to have                                                               
staff to do that, and how much money would that cost.                                                                           
COMMISSIONER GALVIN  answered that it  is like the  "80-20 rule,"                                                               
where with 20  percent of the effort, one gets  80 percent of the                                                               
results.  In terms of  responding to the question, the department                                                               
must make sure  that it is requesting and providing  a picture of                                                               
where it believes  it can get the best return  for the additional                                                               
expenditure.  Similar to how  a tax system relates to investment,                                                               
there are  a number of different  factors that would go  into the                                                               
ability  of  just  giving  the department  more  staff  and  more                                                               
appropriation and having more audits and more effective audits.                                                                 
CO-CHAIR  JOHNSON  interjected  that  he  is  not  interested  in                                                               
auditing  everyone.   In regard  to the  six years,  he requested                                                               
that  the  department  think  about whether  there  are  ways  to                                                               
streamline things and make them more efficient.                                                                                 
4:05:42 PM                                                                                                                    
COMMISSIONER  GALVIN  returned  to the  resident  hire  provision                                                               
proposed by  Version E and  noted that in retrospect  the numbers                                                               
shown on slide 5 are still valid.                                                                                               
MS. DAVIS directed  attention to the far right column  of the top                                                               
table on slide 5 labeled,  "Current Tax Liability before Rebate,"                                                               
and  instructed  members to  assume  the  figures are  calculated                                                               
appropriately with  the rebate going  against the base  tax only.                                                               
The slide depicts  three companies:  Company A  is small, Company                                                               
B is  medium sized, and  Company C is  large.  She  then directed                                                               
attention  to the  bottom table  on  slide 5  and explained  that                                                               
Company  A  currently  has  a  workforce  of  87  percent  Alaska                                                               
residents  and wants  to  get  to 87.5  percent.    Company A  is                                                               
currently enjoying a  6 percent rebate so the  current tax rebate                                                               
is $6 million.  If Company A  gets to the 87.5 percent [by adding                                                               
20 Alaskan employees],  it will receive $8 million  in rebate, an                                                               
increase of  $2 million.   Company B  is currently at  82 percent                                                               
Alaska workforce  and if  it goes  to 82.5  percent by  adding 29                                                               
Alaskan  employees it  will receive  an  additional $10  million.                                                               
Company C is  at 79.5 percent and  has no rebate, but  if it goes                                                               
to 80 percent  by adding 50 Alaskan employees it  would receive a                                                               
$30 million rebate.                                                                                                             
4:08:06 PM                                                                                                                    
COMMISSIONER GALVIN added that the  number of employees means the                                                               
hiring  of Alaskans  who are  currently not  part of  a company's                                                               
labor  pool;  the  Alaska  hires  would be  an  addition  to  the                                                               
company's existing  labor pool.   It is  not being said  that the                                                               
Alaskan  employees  would  substitute for  out-of-state  workers,                                                               
which would be a potentially lower number to make that change.                                                                  
MS. DAVIS interjected that the chart is not assuming any firing.                                                                
4:08:35 PM                                                                                                                    
MS. DAVIS moved  to slide 6, which depicts the  least amount that                                                               
the rebate  would be.   If Company A  moved from an  87.5 percent                                                               
Alaska workforce  to 90 percent,  then that would be  an addition                                                               
of 20  employees and  it would cost  about $19,000  per employee.                                                               
It could  be anywhere  from $2 million  to that  number depending                                                               
upon how close Company  A is to the line in the  tier.  This gets                                                               
to the  discussion of whether  it would be better  to do it  in a                                                               
linear fashion if  there is a way to draft  it because that would                                                               
avoid the inequities on either end of the line.                                                                                 
CO-CHAIR JOHNSON responded  that he is not locked in  if there is                                                               
a way  to draft  it as  he does  not want  to deter  someone from                                                               
going from 82  percent to 85 percent.   He said he  would like to                                                               
see  that every  employee hired  is  a benefit  and allowed  that                                                               
maybe Representative  Seaton's way is  the right  way to go.   He                                                               
added that he  would like to work with the  department on some of                                                               
the finer points.   The committee should move with  the things on                                                               
which there  is agreement and  where there is  disagreement there                                                               
should  be  an   attempt  to  make  them  as   palatable  to  the                                                               
administration as possible.                                                                                                     
[HB 308 was held over.]                                                                                                         

Document Name Date/Time Subjects
CSHB 217 Vers R Memo.pdf HRES 2/10/2010 1:00:00 PM
HB 217
CSHB 217 vers R.pdf HRES 2/10/2010 1:00:00 PM
HB 217
HB308 Administration Review - 2 10 10.pdf HRES 2/10/2010 1:00:00 PM
HB 308