Legislature(2017 - 2018)SENATE FINANCE 532

04/30/2018 09:00 AM Senate FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSSSSB 76(FIN) Out of Committee
Heard & Held
HOUSE BILL NO. 398                                                                                                            
     "An Act  relating to  the allocation  and apportionment                                                                    
     of  income of  a  public utility  for  purposes of  the                                                                    
     Alaska  Net  Income  Tax  Act;  and  providing  for  an                                                                    
     effective date."                                                                                                           
Vice-Chair   Bishop  MOVED   to  ADOPT   proposed  committee                                                                    
substitute  for HB  398,  Work  Draft 30-LS1231\O  (4/30/18,                                                                    
Co-Chair MacKinnon OBJECTED for discussion.                                                                                     
REPRESENTATIVE  NEAL  FOSTER,  SPONSOR, explained  that  the                                                                    
bill  would repeal  the specific  exemption for  multi-state                                                                    
corporations  operating public  utilities in  the state.  He                                                                    
relayed that  the 2015 Indirect  Expenditure report  put out                                                                    
by the Department  of Revenue (DOR) had  identified that the                                                                    
exemption did  not closely relate to  the legislative intent                                                                    
and could be considered a  loophole that would allow certain                                                                    
multi-state  corporation  to   reduce  their  corporate  tax                                                                    
liability. The  bill would repeal the  exemption and require                                                                    
multi-state  public  utility   corporations  to  follow  the                                                                    
formula   currently   used   by  other   non-oil   and   gas                                                                    
corporations. He  said that DOR had  identified that passage                                                                    
of  the  legislation would  result  in  ne revenue  for  the                                                                    
9:23:42 AM                                                                                                                    
BRODIE ANDERSON,  STAFF, REPRESENTATIVE NEAL  FOSTER, stated                                                                    
that the CS had two changes:                                                                                                    
Page 1, line 7:                                                                                                                 
add: "and apportion"                                                                                                            
Page 2, line 5:                                                                                                                 
Sec.  4. Section  3  of this  Act  takes effect  immediately                                                                  
under AS 01.10.070(c).                                                                                                          
Mr.  Anderson  addressed  the Sectional  Analysis  (copy  on                                                                    
Section  1: adds  new Section  43.20.146.  This removes  the                                                                  
exemption of  multistate public utilities from  water's edge                                                                    
reporting within the Multistate Tax Compact.                                                                                    
Section  2:   adds  new  section:   Applicability  Language;                                                                  
Section 1  does not take  effect under AS 43.20  (Alaska Net                                                                    
Income Tax Act) until the effective date.                                                                                       
Section   3:   adds   new  section:   Transition   Language;                                                                  
Regulations shall  change to  implement the  legislation but                                                                    
not be adopted before January 1, 2019.                                                                                          
Section 4: Effective  date: Sections 1 and 2  take effect on                                                                  
January 1, 2019.                                                                                                                
Senator   Micciche   thought   that   the   range   on   the                                                                    
indeterminate fiscal  note of $100  thousand and  $5 million                                                                    
was problematic.  He wondered whether  a description  of the                                                                    
factors between those amounts could be determined.                                                                              
Mr. Anderson stated that the  department was careful to keep                                                                    
the information confidential. He said  it was known that the                                                                    
bill did  not apply to  corporations or utilities  that were                                                                    
100  percent  Alaskan.  He  shared that  in  2015  when  the                                                                    
indirect  expenditure  report  originally  came  out,  three                                                                    
beneficiaries  were  identified,  with  the  possibility  of                                                                    
five. Due  to the  small pool,  a large  span had  been used                                                                    
because of the size of the potential revenue.                                                                                   
9:27:25 AM                                                                                                                    
Senator  Micciche  assumed  that there  were  no  interstate                                                                    
commerce or equal protection issues with the bill.                                                                              
Mr. Anderson revealed that there  had been legal discussions                                                                    
about  the use  of the  Multistate Compact  Act. He  relayed                                                                    
when   the  compact   was  first   written  both   financial                                                                    
organizations and  public utilities had been  exempted, then                                                                    
in  the  mid-80s  regualtion  had  been  changed  to  remove                                                                    
financial  organizations and  at  that point  there were  no                                                                    
utilities  utilizing  the  act.   Now  that  taxpayers  were                                                                    
utilizing  the act  it  was felt  that  authority should  be                                                                    
Co-Chair MacKinnon  asked when the  tax credit was  put into                                                                    
effect, and  whether it  showed up  in the  indirect expense                                                                    
Mr. Anderson  stated that  the credit  was enacted  in 1970,                                                                    
when the state had first  adopted the multistate compact. In                                                                    
1985, the  department had changed  regulation and  the issue                                                                    
had bot  been addressed until the  2015 Indirect Expenditure                                                                    
9:29:55 AM                                                                                                                    
Vice-Chair  Bishop  asked  about  the  impact  of  the  bill                                                                    
considering  the  federal  government  had  recently  passed                                                                    
sweeping tax  overhaul. He wondered  whether the bill  was a                                                                    
job-creator or  job-killer for the businesses  that would be                                                                    
Mr.  Anderson   stated  that  all  other   non-oil  and  gas                                                                    
currently  followed   the  three-factor   apportionment  for                                                                    
calculating  tax liability.  The  bill  put all  multi-state                                                                    
corporations (non-oil and gas)  on equal footing; they would                                                                    
all be  treated the  same way in  how they  calculated their                                                                    
tax liability  for Alaska.  He deferred  further explanation                                                                    
to DOR.                                                                                                                         
9:31:47 AM                                                                                                                    
BRANDON  SPANOS, DEPUTY  DIRECTOR, TAX  DIVISION, DEPARTMENT                                                                    
OF  REVENUE (via  teleconference), explained  that the  bill                                                                    
was  not a  tax exemption.  He shared  that the  compact had                                                                    
exempted  public utilities  and financial  institutions from                                                                    
the  three-factor   formula;  they  were  not   exempt  from                                                                    
corporate  income  tax,  but they  could  choose  their  own                                                                    
method of allocating their income to Alaska. The three-                                                                         
factor formula  used in the  compact applied to  all non-oil                                                                    
and  gas  corporations.  He discussed  the  distribution  of                                                                    
income for  public utilities  and financial  institutions to                                                                    
the state. He  said that the department  had determined that                                                                    
all  corporations should  file  with  the same  three-factor                                                                    
formula;  multistate public  utilities  operated similar  to                                                                    
other  multistate corporations  and  should  use the  three-                                                                    
factor  formula.   He  asserted  that  the   state  was  not                                                                    
beginning  to tax  a  corporation that  had  not been  taxed                                                                    
before,  the  method for  distribution  of  income would  be                                                                    
regulated, rather than  letting corporations determine their                                                                    
own method.                                                                                                                     
9:34:55 AM                                                                                                                    
Vice-Chair Bishop  asked Mr. Spanos  whether the  bill would                                                                    
affect employment for the companies involved.                                                                                   
Mr. Spanos  was unable to  determine whether the  bill would                                                                    
affect employment.  He noted that the  fiscal note reflected                                                                    
a  positive impact  for the  state,  which would  negatively                                                                    
affect a utility filing under the different method.                                                                             
Vice-Chair  Bishop   qualified  that   he  thought   it  was                                                                    
important to understand how the bill would affect jobs.                                                                         
Senator von  Imhof asked  whether the  words "apportionment"                                                                    
and  "appropriated"  had  been   used  purposefully  in  the                                                                    
original writing of the compact.                                                                                                
Mr. Spanos replied that when  the Multistate Tax Compact was                                                                    
formed, public  utilities were  usually highly  regulated by                                                                    
states,  who  often  ran  them. At  that  time  most  public                                                                    
utilities  were 100  percent within  the  state, which  made                                                                    
apportionment  unnecessary.  He  said   that  in  trying  to                                                                    
predict  what  public  utilities  would  look  like  in  the                                                                    
future,  assuming  that  they would  cross  state  lines,  a                                                                    
method of  allocation was determined.  He stated  that since                                                                    
multistate  utilities   operated  similarly  to   all  other                                                                    
corporations,  most  other  states had  adopted  the  three-                                                                    
faction formula to apportion and allocate their income.                                                                         
9:38:14 AM                                                                                                                    
Senator  von Imhof  understood that  as  utilities had  gone                                                                    
multistate,  other  states  had moved  to  the  three-factor                                                                    
formula. She  asked if he  could tell her three  states that                                                                    
had made the change.                                                                                                            
Mr. Spanos  clarified that  not all  states used  the three-                                                                    
factor  formula any  longer,  many used  a  single sales  or                                                                    
double  weighted sales  factor  in an  attempt to  encourage                                                                    
manufacturing  in   their  states.   He  said   that  public                                                                    
utilities in  other states did  tax public utilities  in the                                                                    
same method that they taxed all other corporations.                                                                             
Senator   Micciche  asked   how   many  multi-state   public                                                                    
utilities were currently operating in the state.                                                                                
Mr. Spanos stated that there was more than a dozen.                                                                             
Vice-Chair Bishop referenced a  letter from Mr. Spanos (copy                                                                    
on file):                                                                                                                       
     Currently,  there are  3 public  utilities utilizing  a                                                                    
     method   other    than   the    standard   three-factor                                                                    
     apportionment formula  to apportion or  allocate income                                                                    
     to Alaska.                                                                                                                 
Vice-Chair  Bishop  understood   that  the  other  utilities                                                                    
operating in the state were  using the formula referenced on                                                                    
page 1 or the letter, Sec. 2, Art. IV of AS 43.19.                                                                              
Mr. Spanos replied in the affirmative.                                                                                          
9:40:49 AM                                                                                                                    
Senator Olson asked  what affect the bill would  have on the                                                                    
end user.                                                                                                                       
Mr. Spanos  replied that the  tax was  a net income  tax and                                                                    
was on  the corporations total  U.S. income and  depended on                                                                    
many factors. He                                                                                                                
9:41:59 AM                                                                                                                    
Senator  Olson  wondered  whether   the  bill  would  affect                                                                    
international corporations with operations in Alaska.                                                                           
Mr. Spanos responded that if  the corporation had other U.S.                                                                    
operations, they  would be affected  but if the  company had                                                                    
only  operations  in Alaska  it  would  have no  effect.  He                                                                    
clarified that  non-oil and gas  companies did  not consider                                                                    
non-U.S. income.                                                                                                                
9:43:03 AM                                                                                                                    
Co-Chair MacKinnon  WITHDREW her  OBJECTION. There  being NO                                                                    
OBJECTION, it was so ordered. SCS HB 398(FIN) was ADOPTED.                                                                      
Co-Chair MacKinnon OPENED public testimony.                                                                                     
Co-Chair MacKinnon CLOSED public testimony.                                                                                     
9:44:24 AM                                                                                                                    
Vice-Chair   Bishop   discussed   FN   1(REV),   which   was                                                                    
indeterminate. He read from the note's analysis on page 2:                                                                      
     Currently there are a small  number of public utilities                                                                    
     utilizing  a  method  other than  the  standard  three-                                                                    
     factor apportionment  formula to apportion  or allocate                                                                    
     income  to Alaska.  Because of  the  limited number  of                                                                    
     impacted  taxpayers, including  one taxpayer  who could                                                                    
     generate over  80% of potential revenue,  we are unable                                                                    
     to  provide an  estimate  of  the additional  potential                                                                    
     revenue  due to  confidentiality concerns.  However, we                                                                    
     estimate  that  there  will be  a  material  amount  of                                                                    
     additional  revenue  collected,  between  $100,000  and                                                                    
     $5,000,000, if this legislation were to pass.                                                                              
     This legislation  would not  require the  Department of                                                                    
     Revenue  to update  its Tax  Revenue Management  System                                                                    
     (TRMS).  There  would  also be  no  needed  changes  to                                                                    
     forms. The  only anticipated change  would be  to draft                                                                    
     transition  regulations.  We  would be  able  to  draft                                                                    
     transition language with current resources.                                                                                
9:45:35 AM                                                                                                                    
HB 398 was HEARD and HELD in committee for further                                                                              
Co-Chair MacKinnon discussed housekeeping.                                                                                      

Document Name Date/Time Subjects
HB 398 SCS HB 398 work draft version O.pdf SFIN 4/30/2018 9:00:00 AM
HB 398
HB 398 legal memo RE.v.J.pdf SFIN 4/30/2018 9:00:00 AM
HB 398