Legislature(2017 - 2018)BUTROVICH 205

04/19/2018 03:30 PM Senate STATE AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Bill Hearing Canceled>
Moved HB 398 Out of Committee
-- Public Testimony --
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved HB 47 Out of Committee
Moved SCS CSHCR 19(STA) Out of Committee
       HB 398-CORP TAX: PUBLIC UTILITY INCOME ALLOCATION                                                                    
3:34:20 PM                                                                                                                    
CHAIR MEYER announced the consideration of House Bill 398 (HB
3:34:52 PM                                                                                                                    
BRODIE ANDERSON, Staff, Representative Foster, Alaska State                                                                     
Legislature, Juneau, Alaska, provided an overview of HB 398 as                                                                  
     House Bill 398 addresses  foregone revenue and provides                                                                    
     the state  with the ability  to capture new  revenue in                                                                    
     Alaska corporate income tax  through the elimination of                                                                    
     the   public   utility   exemption   for   water's-edge                                                                    
     A  brief   history  on  how   we  got  this   piece  of                                                                    
     legislation introduced.  Back in 2004,  legislation was                                                                    
     passed  that required  both the  Department of  Revenue                                                                    
     and Legislative Finance to create  a report on indirect                                                                    
     expenditures  and the  amount of  foregone revenue  not                                                                    
     captured by  the state. The first  indirect expenditure                                                                    
     report  was  submitted  in  2015,  in  that  report  it                                                                    
     identified a  list of indirect expenditures  within the                                                                    
     Department of  Revenue that should be  terminated; then                                                                    
     last  year in  the FY18  budget process,  House Finance                                                                    
     Subcommittee  for the  Department  of Revenue  reviewed                                                                    
     these  indirect expenditures  and recommended  that the                                                                    
     House   Finance   Committee  offer   legislation   that                                                                    
     eliminates these indirect  expenditures. House Bill 398                                                                    
     repeals a  specific exemption from  the recommendations                                                                    
     offered in both of those reports.                                                                                          
     The indirect expenditure repealed  in House Bill 398 is                                                                    
     the public  utility exemption and  it was  selected for                                                                    
     the following  reason: It did not  meet the legislation                                                                    
     intent and it  was felt that it provided  a loophole by                                                                    
     allowing  multi-state corporations  operating a  public                                                                    
     utility in Alaska to  choose their apportionment method                                                                    
     that  is  complementary  to providing  the  lowest  tax                                                                    
     liability possible for the corporation.                                                                                    
     Typically,  multi-state  corporations use  three-factor                                                                    
     formula  for  apportionment,  this formula  uses  three                                                                    
     fractions  represented  by   ratios  of  the  company's                                                                    
     property, payroll  and sales  within the  taxing state,                                                                    
     this one being Alaska,  to their total property payroll                                                                    
     and  sales within  the United  States or  water's edge.                                                                    
     The three  ratios are multiplied together  to produce a                                                                    
     percentage of the company's total  taxable income to be                                                                    
     allocated  to  the  taxing  state,  Alaska;  this  only                                                                    
     applies to  all non-oil-and-gas corporations,  for oil-                                                                    
     and-gas corporations  we use  a formula based  on their                                                                    
     Alaskan profits and their worldwide profits.                                                                               
     The Department  of Revenue  cannot indicate  the amount                                                                    
     of  potential new  revenue captured  because the  small                                                                    
     amount of  taxpayers utilizing the exemption,  they are                                                                    
     required to keep that  tax information confidential due                                                                    
     to  the  size of  the  tax  pool, they  have  indicated                                                                    
     though that  there will be  new revenue if  this passes                                                                    
     according to  their fiscal note provided  to members in                                                                    
     their packet.                                                                                                              
3:37:51 PM                                                                                                                    
CHAIR MEYER asked Mr. Anderson to review the sectional analysis                                                                 
for HB 398.                                                                                                                     
MR. ANDERSON reviewed the sectional analysis as follows:                                                                        
     Section 1                                                                                                              
     Adds  a new  section, AS  43.20.146, which  removes the                                                                    
     exemption  of  the  multistate  public  utilities  from                                                                    
     water's-edge reporting  from within the  Multistate Tax                                                                    
     Section 2 & Section 3                                                                                                  
     Are uncodified  law dealing  with the  applicability of                                                                    
     the  effective date  and  transition  language for  the                                                                    
     regulations that would  be drafted not to  be in effect                                                                    
     until January 1, 2019.                                                                                                     
     Section 4                                                                                                              
       The effective date which applies to Section 1 and                                                                        
     Section 2 of the bill is January 1, 2019.                                                                                  
3:39:03 PM                                                                                                                    
At ease.                                                                                                                        
[CHAIR MEYER set HB 398 aside until later in the meeting.]                                                                      
       HB 398-CORP TAX: PUBLIC UTILITY INCOME ALLOCATION                                                                    
4:14:13 PM                                                                                                                    
CHAIR MEYER called the committee  back to order. He announced the                                                               
committee's continuation of the hearing on HB 398.                                                                              
SENATOR WILSON asked if there is opposition to the bill.                                                                        
MR. ANDERSON replied  that the bill has  not received opposition.                                                               
He  confirmed  from  previous  hearings   in  the  House  Finance                                                               
Committee that  the bill will  not affect the  state's nonprofit-                                                               
public utilities,  strictly multi-state corporations that  have a                                                               
public  utility  within  Alaska's boundaries.  He  detailed  that                                                               
approximately one to five corporations might be impacted.                                                                       
CHAIR  MEYER asked  if the  corporations that  will be  adversely                                                               
impacted know that HB 398 was working through the process.                                                                      
MR.  ANDERSON replied  that he  has contacted  specific lobbyists                                                               
that have  contracts within some of  the multi-state corporations                                                               
to figure  out whether they  would be  impacted and what  type of                                                               
opposition might  come against HB  398. He disclosed that  he has                                                               
not received opposition notification from the corporations.                                                                     
4:17:46 PM                                                                                                                    
BRANDON SPANOS, Deputy Director,  Tax Division, Alaska Department                                                               
of Revenue, Anchorage, Alaska, confirmed  that he has spoken with                                                               
specific taxpayers  on the legislation's impact.  He assumed that                                                               
those impacted the most know about HB 398.                                                                                      
CHAIR  MEYER   said  he  was  concerned   that  the  corporations                                                               
currently receiving  the tax exemption  will pass the  added cost                                                               
from the  legislation on  to Alaskan. He  asked if  the Regulator                                                               
Commission of Alaska (RCA) has oversite.                                                                                        
MR.  SPANOS  explained  that  the   RCA  does  not  regulate  all                                                               
utilities.  He pointed  out that  telecommunications  used to  be                                                               
regulated, but currently falls under that utility definition.                                                                   
CHAIR MEYER remarked that he  questioned Mr. Sponos' response. He                                                               
said he believed  that the RCA does have  regulatory oversite and                                                               
noted that he had dealt with a bill that addressed the topic.                                                                   
MR. SPANOS admitted  that he was not an expert  in the regulation                                                               
4:20:04 PM                                                                                                                    
CHAIR MEYER  pointed out that HB  398 has a zero  fiscal note. He                                                               
asked if the hope is the state will get some money back.                                                                        
MR.  ANDERSON answered  yes. He  explained that  the fiscal  note                                                               
reflects an increase of some sort  due to the potential change in                                                               
tax liability for corporations utilizing the exemption.                                                                         
CHAIR MEYER  noted that  Mr. Anderson  mentioned that  the normal                                                               
process is a three-step process  and the affected corporations do                                                               
not have to meet the three-step process.                                                                                        
MR. ANDERSON answered correct. He detailed as follows:                                                                          
     Back  when  we first  wrote  the  Alaska Corporate  Tax                                                                    
     Code,  banking  organizations, financial  organizations                                                                    
     and  public utilities,  multi-state corporations,  were                                                                    
     exempt.   In  the   '80s,   Alaska  removed   financial                                                                    
     organizations but  at that point no  public utility was                                                                    
     utilizing  this exemption  so  when  the Department  of                                                                    
     Revenue removed  the exemption, it  did not  come under                                                                    
     the radar that public utilities had an exemption.                                                                          
     So, we fast  forward until I believe  the document from                                                                    
     the Department  of Revenue  said about  10 to  15 years                                                                    
     ago, public utilities  or at least a  couple started to                                                                    
     utilize  the exemption  and that's  why they  felt that                                                                    
     they   needed  a   statutory  change   rather  than   a                                                                    
     regulatory  change to  get rid  of  this exemption  and                                                                    
     that's with water's-edge  reporting for calculating all                                                                    
     other   multi-state   corporations   use   water's-edge                                                                    
     reporting  where you  compare, you  create the  formula                                                                    
     for  your Alaska  sales, payroll  and property  against                                                                    
     your U.S. or water's-edge  sales, payroll and property,                                                                    
     and then out  of that the percentage  is calculated for                                                                    
     you   Alaska   tax   liability;  that   formula,   that                                                                    
     percentage  is exempt  for  public  utilities that  are                                                                    
     multi-state corporations  because of the  exemption and                                                                    
     as  long as  it  is  in line  with  what Department  of                                                                    
     Revenue  agrees  with,  they can  calculate  their  own                                                                    
4:22:22 PM                                                                                                                    
CHAIR MEYER opened and closed public testimony.                                                                                 
4:22:48 PM                                                                                                                    
SENATOR GIESSEL moved to report  HB 398, version 30-LS1231\D from                                                               
committee  with  individual  recommendations  and  attached  zero                                                               
fiscal note.                                                                                                                    
4:23:01 PM                                                                                                                    
CHAIR  MEYER  announced  that  being  no  objection,  the  motion                                                               

Document Name Date/Time Subjects
HB 398 Sponsor Statement 4.3.18.pdf SSTA 4/19/2018 3:30:00 PM
HB 398
HB 398 Version D.PDF SSTA 4/19/2018 3:30:00 PM
HB 398
HB 398 Sectional Analysis v.D 4.3.18.pdf SSTA 4/19/2018 3:30:00 PM
HB 398
HB 398 Additional Documents - Legislative Legal Services Memo 1.9.2018.pdf SSTA 4/19/2018 3:30:00 PM
HB 398
HB 398 Additional Documents - Dept. of Revenue Letter of Explanation 4.3.18.pdf SSTA 4/19/2018 3:30:00 PM
HB 398
HB 398 Additional Documents - 2015 Indirect Expenditure Report-Public Utility Exemption.pdf SSTA 4/19/2018 3:30:00 PM
HB 398
HB 398 Fiscal Note.pdf SSTA 4/19/2018 3:30:00 PM
HB 398
HB 47 Fiscal Note OMB 2866.pdf SSTA 4/19/2018 3:30:00 PM
HB 47
HB 47 Actuarial Letter Conduent 4.5.2018.pdf SSTA 4/19/2018 3:30:00 PM
HB 47
ANLPAC2018 Report to the Governor and Legislature.pdf SSTA 4/19/2018 3:30:00 PM
HCR 19
HCR 19 Version T.pdf SSTA 4/19/2018 3:30:00 PM
HCR 19