Senate Finance, 4/21/26, 1:30pm

[FOREIGN LANGUAGE] [Speaker:CHAIR] Call Senate Finance Committee back to order.

We're in State Capitol Senate Finance Room, April 21st. It is 1:33. Present today, Chairman Steadman. Chairman Olson is excused this afternoon. Senator Keele, Senator Merrick, Senator Kaufman, Senator Cronk, and myself, Senator Hoffman.

We have one item on today's calendar, that is HB 280, a proportion taxable income piece of legislation. I invite Brody Anderson, staff to Representative Foster, Esquire, to the table.

Please identify yourself and tell us what you're trying to do to us.

Thank you. For the record, Brody Anderson, staff to Representative Neil Foster. The representative apologizes for not being here as well. He is actually running House Finance today. So to summarize what House Bill— House Bill 280, the House Finance Committee substitute, does: this bill amends the current Alaska Multi-State Compact from a cost performance methodology in apportionment formula to a market-based sourcing methodology.

Market-based sourcing is a tax rule that clarifies that the state gets to tax a business based on where the customer receives the benefit of service rather than where the company does its work. An example of that would be some of the online locations that are based out of their headquarters in California versus actual— the sale taking place in Alaska. This modernizes the Alaska Multi-State Compact to account for the way sales occur now in the digital age. Currently, there are 36 other states that are already using a form of market-based sourcing. Uh, in House Finance, there were a couple modifications done to this bill.

The first one includes 3 exemptions that were added in House Finance. One for broadcasters, two for financial institutions, and three for telecommunications service providers.

The original bill included portions that would create a statewide tax known as the highly digitized business. After talking with the Department of Revenue on these issues, there were problems with what is the definition of a highly digitized business. There were potential conflicts with the federal Freedom of the Internet Act. And then also there were other concerns expressed by the department in regarding how to enact it and then also the enforcement of a tax in that manner. So with that conversation, House Finance removed that portion of the bill.

The effective date for this bill is January 1st, 2027. Giving time for the department to create and implement the program and the regulations that will be required. So that basically makes this bill effective for the filings for the tax year of 2027. In the current form, this bill will raise approximately $15 million of new revenue for the state. And this port— this version of the CS mirrors the portion of a governor's tax bill that is moving, or at least in both bodies of the legislature.

Mr. Co-chair, this is a summary of HB 280, the House Finance CS. Thank you, Mr. Anderson. Also available online for finance members' questions, we have Emily Newman with Legislative Legal and Brandon Spanos, Acting Director for Department of Revenue Tax Division. Do members have questions of the prime sponsor's staff or any members that are online? Senator Steadman.

Thank you, Mr. Chairman. So maybe somebody from the department could help if the department supports this bill, if we're on the right track, or is this something new and different. Ms. Newman or Brandon Spanos, do you have comment to Senator Steadman's question?

This is Brandon Spanos, Acting Director for the Tax Division. Through the Chair, Senator Steadman, the Governor has similar language in his omnibus tax bill. That said, we are neutral on this bill. Senator Steadman. Further questions?

Senator Keogh. Thank you, Mr. Chairman. I'd be interested in the department's analysis. There were different methods for a couple of industries that the sponsor's staff mentioned today— broadcasters, telecom, banking. Can you, Mr. Spanos, walk us through what those differences are and whether they are good, bad, or indifferent?

Mr. Spanos.

Sure. Through the Chair, Senator Keele, there were 3 amendments to this bill in House Finance. That were specific to special industries. First was the banking, which added just some language that stated that the Department of Revenue would implement regulations consistent with the Multistate Tax Commission's regulations for banking industry. And we had made statements on the record in, in the other body that we would do just that.

And so that's really just codifying what we stated we would do. We like the Multistate Tax Commission regulation that they put out there for other states to consider, and we'll likely adopt something similar with or without that language. The other two changes, one was for broadcasters, and it basically makes an exception to market-based sourcing for certain types of broadcasting. So, for over-the-air broadcasting, if a network were to pay someone to run a commercial during their broadcast, the current language in the bill before you states that instead of using market-based sourcing, which is where your customers are, that are watching the program, you would source the sales to wherever the payer of the commercial is located. So that would not be in Alaska in almost every case.

And so the Tax Division has suggested that we go to market-based sourcing for a lot of years. We like market-based sourcing. It's more consistent. It's more modern. Consistent with what other states are doing, and it's a more modern approach because using the cost of performance method is an outdated approach to more of a physical presence standard that used to be done with corporate income tax.

But under the market-based sourcing rules that a lot of states have adopted, you rather than look at where the costs are incurred, you look at where the customers they are marketed to are located. And we like using that method. So for the broadcasters, we would— the Tax Division would prefer adopting similar market-based approach. And then lastly is the telecoms, and they would be exempt completely from market-based sourcing and would continue on the cost-to-performance method, which instead of looking again where your market is, you look at where the costs are incurred. So if a telecom has— is physically present in Alaska, there would be no change for them.

Today they're paying based on their physical presence in Alaska, and therefore all of their costs are associated with the state. But if you were an out-of-state company with most of your costs in another state, then you could use cost of performance and allocate zero sales to Alaska based on cost performance. So again, we would prefer cost performance for all industries and then have special treatment if that is not a fair treatment for a specific industry, as is already all written in most of our statutes and regulations.

Senator Keogh. Thank you, Mr. Chairman. As I think through the telecom piece, I guess that gives me a little bit of pause, and I may need some help understanding it. I don't know if the sponsor staff could help or others.

If I understood Mr. Spanos correctly from the tax division, those telecoms that invested in Alaska, built out whether it's wireline or cell sites, would end up effectively more subject to tax than those who do not invest in Alaska? Is that correct? Through the chair, Senator, I would defer to Mr. Spanos before I attempt to answer that question. Mr. Spanos, do you have comment on Senator Keel's question? Through the chair, Senator Keel, that's a fair statement.

Yes. If you're If all of your costs are located in Alaska, then under our current cost of performance statutes, you would source your sales to Alaska. If you can show that the majority of your costs are outside of the state, then you are able to source your sales to another state, and, and it is what currently happens under cost of performance for, for out-of-state telecoms. And so under the market-based sourcing approach, you would source your sales on where your customer is rather than where your costs are. So that's why we have for a lot of years suggested that the state move to market-based sourcing.

It's a more modernized approach, considering where your customers are located for sales purposes rather than where your costs are. Senators are—. Senator Keele. Thank you, Mr. Chairman. Thank you, Senator Keele.

Further questions of the sponsor or those online for questions? Senator Kaufman. Thank you. I have a question. I guess maybe the department can answer it.

Looking at these definitions, so if we say that a broadcaster is means a taxpayer that is a television broadcast network, a cable program network, or a platform distribution company. I'm wondering where the cutoff is in that. So is it— would it be YouTube, or would it be the people have channels on YouTube? Would they become the taxpayers under this scheme? I'm just wondering.

Where the boundary line is for how far down into the network system one goes on a platform. Mr. Spanos.

Yes, through the Chair, Senator Kaufman, this is a specialized definition and unfortunately our corporate income specialist who otherwise would be answering this specific type of question is out of the office today, so you just have me, which is more of a higher-level view, and I probably have to get back to you with some specifics. But the plain reading of the language does use that term platform distribution company, which I believe would include those streaming services, but I would have to Verify that. Thank you, Senator Kaufman. Thank you, Senator Kaufman. Further questions from the Finance Committee?

Seeing no further questions, Mr. Brody, do you have any closing comments? Since this is the first hearing, we will be setting this bill aside after we hear the fiscal impacts, but closing comments, Mr. Anderson. Co-chair Hoffman, thank you for the opportunity to present in front of House Senate Finance Committee. So thank you very much. Just about slipped and gave us a promotion.

Senator Keehl, fiscal notes. Thank you, Mr. Chairman.

House Bill 280 has one fiscal note from the Department of Revenue Tax Division. I want to make sure I'm looking at this year's fiscal note. Here we are. It shows an FY '27 appropriation will be needed of $321,700. That's— fund source is unrestricted general funds and would require 2 full-time positions to implement.

The department also notes that they will need to update or change regulations as a result. The change of revenue is listed as indeterminate. The second page analysis suggests revenues in the neighborhood of $10 to $15 million annually at full implementation. So perhaps not in year 1. Thank you.

With that, we'll open the public hearing process. Is there anyone online that would like to testify on this legislation? Seeing none, anyone in the audience that would like to testify? On House Bill 280? Seeing none, we'll close the public hearing.

We will set this bill aside for further consideration.

We have tomorrow morning at 9:00 a.m. two pieces of legislation: HB 10, add facility member to the University Board of Regents, and House House Bill 39, Education for Deaf and Hard of Hearing.

Please note that we are hearing House Bills, Mr. Anderson. So is there anything else to come before the committee at this time?

Seeing none, we are adjourned.