Joint Revenue Committee minutes for the meeting of June 27, 2002.

M I N U T E S

JOINT REVENUE INTERIM COMMITTEE

Natrona County School District Board Room June 27, 2002

970 North Glenn Road Casper, Wyoming

PRESENT: Senator Robert Peck, Cochairman;

Senators Irene Devin, Dick Erb, Rae Lynn Job and Jayne Mockler;

Representatives Rodney "Pete" Anderson, Chris Boswell, Roy Cohee, Roger Huckfeldt, Phil Nicholas, Doug Osborn, Don Warfield and Jane Wostenberg.

Legislative Service Office: Mark Quiner, Assistant Director; and Mr. Steve Sommers, Budget/Fiscal Manager.

Other Legislators Present: Senator Bill Hawks

Others: See Attachment A.

ABSENT: Representative Pat Nagel, Cochairman.

* * * * *

Chairman Peck called the meeting to order at approximately 9:00 a.m. The order of the meeting generally followed the prepared agenda (see Attachment B).

Chairman Peck welcomed Representative Don Warfield as a new member of the Committee.

POWDER RIVER COAL DECISION

Mr. Earl Atwood, Director, and Mr. Randy Bolles, Department of Revenue, explained the issue surrounding the Powder River coal decision (see Exhibit A-1). Mr. Bolles explained the Wyoming Supreme Court recently held in the Powder River Basin coal decision that bonus money is not a direct cost of production, rather it is an indirect cost. This will result in a reduced taxable value of around $24 million (see Exhibit A-2). The Supreme Court has held that any cost not specifically enumerated in the statute and subject to allocation between different functions, is not a direct cost but an indirect cost of mining. Mr. Bolles explained an oil and gas industry taxpayer is now arguing the same point for oil and gas valuation (see Exhibit A-3).

Ms. Wendy Lowe, public relations manager for Powder River Coal Company, testified on behalf of the Wyoming Mining Association (see Exhibit A-4). She indicated the Minerals Committee asked for the industry to work with the Department of Revenue to clarify direct mining costs and bring suggestions to the committee. That process has begun and Ms. Lowe felt the department and industry have very few differences left to resolve. They will be bringing their suggested changes to the Minerals Committee in the fall.

Mr. Bill Hartzler, representing the Wyoming Mining Association, thinks the Powder River coal decision was sound. The State Board of Equalization reviewed this decision in 1994, and came to the same conclusion as the Wyoming Supreme Court. He pointed out the industry did not receive everything it proposed (see Exhibit A-5).

Senator Bill Hawks, cochair of the Joint Minerals, Business and Economic Development Interim Committee, indicated the Minerals Committee is waiting for the suggestions from the Wyoming Mining Association and the Department of Revenue. He feels they are working well together and will have results at the August meeting.

Ms. Sarah Gorin, Equality State Policy Center, indicated revenues from coal have lagged coal production due to the decline in prices and lapse of capital facilities tax. She indicated an LSO fiscal note shows coal values will go down due to the proportionate profits method of valuing coal. She indicated the Committee needs good data regarding this issue upon which to base their decision.

Mr. Bruce Hinchey, president of the Petroleum Association of Wyoming, indicated the Supreme Court affirmed what industry has been doing all along.

VALUATION OF NATURAL GAS

Mr. Bolles presented the Committee with information on the valuation of non-arms length processed gas (see Exhibit B-1). He indicated the Department of Revenue has used the comparable value method for valuing non-arms length processed gas since 1990. Some industry taxpayers like to use the proportionate profits method, and the department has allowed this, but the proportionate profits method does not always represent a true value. Mr. Bolles indicated the problem is when prices go up or down the value reported for taxes does not go up or down proportionately with the prices using the proportionate profits method. The department would like to see this changed in statute so the Department of Revenue could use the net back method, amended proportionate profits method or a cost build-up method. He feels an amended proportionate profits method would be best.

Mr. Hinchey said he understands the issues regarding netback methodology, but would like to sit down and meet with the Department of Revenue, the counties and this Committee to work on a bill that is equitable to all. He indicated they would bring any suggestions to the Committee's August meeting.

STREAMLINED SALES TAX PROJECT UPDATE

Mr. Atwood provided the Committee with information on the streamlined sales tax project (see Exhibit C-1). Mr. Dan Noble, Department of Revenue, indicated the streamlined sales tax project is an effort by the state to simplify sales tax. The project would permit cooperating states to collect sales tax on out-of-state sales. He indicated the focus of the project is to provide uniform definitions, simplified exemption administration, rate simplification, and alignment of tax bases between the state and local tax jurisdictions. He indicated it is currently a voluntary program for vendors.

REVENUE UPDATE

Mr. Steve Sommers, Legislative Service Office, provided the Committee with a revenue update (see Exhibit D-1). Mr. Sommers reviewed the projections for the general fund and its sources including severance tax, sales and use tax, permanent mineral trust fund, pooled interest and all other sources, as well as the mineral severance tax and federal mineral royalty revenues. Mr. Sommers indicated the total impact on the general fund is around a 7 percent increase or $11.5 million. As for mineral severance taxes and federal mineral royalties, there is an overall decrease of 2.3 percent. The common school land income fund is down 21 percent from projections; this is due to the investment income decrease. Overall, the total impact is a $3.5 million increase of estimated carryover at the end of 2002. Mr. Sommers indicated it should match up with CREG projections.

Mr. Sommers also discussed the natural gas price situation. He explained there is a price spread between the prices Wyoming receives for its natural gas sold at OPAL versus the natural gas sold in Louisiana at the Henry Hub (see Exhibit D-2).

Following discussion, the Committee asked representatives from the gas industry as well as industry experts be available for the Committee's next meeting to shed any light they can on the price differential situation.

REVENUE NEEDS OF THE STATE - GENERAL DISCUSSION

The Committee then held a round table discussion where each member was permitted to make any comments regarding revenue issues.

CAMA REPORT/UPDATE

Mr. Allen Black, Department of Revenue, explained funds were allocated for a comprehensive CAMA system overhaul last session. He indicated there is a task force with the counties to decide what is needed to update the system. The task force is getting ready to release a request for proposal to 18 companies to bid on the process of updating the CAMA system. They would like to purchase pre-manufactured software off the shelf, not a customized program. The task force consists of members of the Department of Revenue, the State Board of Equalization and the county assessors.

Ms. Brenda Arnold, Laramie County Assessor, indicated the CAMA project is very important. She indicated the county assessor's main goal is to properly value property across the state. There are currently two systems used by the counties to value properties and there are inconsistencies at this time. The CAMA project should help eliminate some of these issues.

FUEL TAX REVISION - 02LSO-0050.C1

Mr. Mark Quiner, Legislative Service Office, explained the bill. He indicated this is a revision of the fuel tax statutes in order to conform the statutes to other Title 39 statutes (see Exhibit E-1). Following discussion, Representative Anderson moved the Committee sponsor the bill as a House bill. The motion passed with a roll call vote of 12 ayes and 1 no (see Exhibit E-2).

TIMBER TAXATION ISSUE

Representative Wostenberg explained timber is now considered a crop under the new agricultural land valuation bill passed by the 2002 Legislature. She would like to discuss this issue at a committee meeting during the interim.

Mr. Black explained 2002 HB 82 for the first time included timberland as an agricultural land for taxation purposes. He indicated the department interpreted this to mean that although timberland was formerly considered as wasteland, the department had to come up with a definition of what qualified as timberland to reach an assessed value for agricultural land valuation purposes. Representative Nicholas explained he amended the forestry language into the bill so those constituents who have $1000 of income each year from agricultural products could qualify if they sold $1000 of timber.

Mr. Black indicated he was not aware of that and would take another look at the proposed rules of the department.

EXCISE TAX TOPICS

Intrastate Transportation Exemptions

Mr. Dan Noble, Department of Revenue, explained the problem with W.S. 39-15-105(a)(viii) in that the statute allows an exemption from sales tax for intrastate transportation by a public utility or others (see Exhibit F-1). Mr. Noble indicated the phrase "or others" has been troublesome to the department and they would like to seek clarification of that statute. Following discussion, Representative Huckfeldt moved the Committee consider Option 1 in Exhibit F-1 for clarification to remove the phrase "public utility or others" from the statute. That would leave the status quo as to how the law is currently enforced. The motion passed.

Sales Tax Vendor Licenses

Mr. Noble explained the department currently has many sales tax vendor licenses which are inactive (see Exhibit G-1). He indicated an inactive license is one where there have been no sales reported in the last three years. The department's concern is that vendors may have a license obtained only to make tax-free purchases. The department would like to cancel any inactive vendor licenses that are not currently being used that have been dormant for three years or more.

Following discussion, Representative Anderson moved the Committee have a bill prepared according to the Department of Revenue's suggestion where a vendor who reports zero dollars in gross sales for three consecutive years shall have their sales tax license cancelled. The motion passed.

Representative Nicholas also requested a form be included to be sent to the vendor to explain the situation.

AD VALOREM TAX TOPICS

Assessment of Telecommunications Companies

Mr. Black explained the issue that telecommunications companies now provide many services besides telecommunications (see Exhibit H-1). Other companies, such as cable TV companies, also provide telecommunication services. Telecommunication services are classified as industrial property and, therefore, assessed at 11.5 percent, whereas other companies, such as cable TV companies are assessed at 9.5 percent since they are considered commercial property. The department would like clarification on how to properly value all telecommunication services.

Ms. Deborah Hinckley, Qwest, testified she thinks all companies that provide data services should be assessed in the same manner. Some are currently assessed at 11.5 percent and some are assessed at 9.5 percent. The law could allow companies to propose the rate to be taxed since industrial property is assessed by the state and commercial property is assessed locally.

Ms. Sue Mecca, community relations manager for Echostar Communications in Cheyenne, provided information on EchoStar. She indicated the facility currently has 1,100 channels with 138,000 square feet. The company was recruited to move to Cheyenne and would not like to see the property tax assessment rate increased on the facility. She indicated EchoStar currently employs over 230 people, they have doubled in size, and any increase in property tax would be adverse to the business. Ms. Mecca indicated the Committee could lower all telecommunication services to 9.5 percent from the 11.5 percent industrial rate.

Ms. Liz Zerga, Western Wireless, also indicated support for taxing telecommunications at 9.5 percent. She indicated a study shows that telecommunication services in general are taxed at twice the rate of other services and in Wyoming there is an additional burden of a universal service fund that many other states do not have.

Telecommunications Tower Companies

Mr. Black explained tower companies are owned privately and lease space on their tower for many different kinds of services, including telecommunications. Some services that lease space on a tower are assessed at the industrial rate of 11.5 percent whereas others are assessed at the commercial property rate of 9.5 percent (see Exhibit J-1).

Mr. Walter Edgars, American Tower Company, indicated his company owns many towers in the state. He would like to meet with the Department of Revenue to resolve the issue and move forward. Tower companies do not provide telecommunication services and they are not regulated as such. He is not opposed in principle to a central assessment system since American Tower Company is centrally assessed in other states where they do business. He feels the towers should be assessed at a commercial rate of 9.5 percent.

Following discussion, Chairman Peck indicated the Committee would lay the issue back and allow the tower companies to discuss the issue with the Department of Revenue.

MOBILE HOMES - DEFINITION OF INVENTORY

Mr. Black provided the Committee with information regarding the issue of mobile homes that are held as inventory by merchants (see Exhibit K-1). He and Ms. Lori Urbigkit, representing the manufactured home industry, indicated they would discuss the issue and feel the issue can be resolved through department rules.

WAM CONVENTION

Mr. George Parks, Wyoming Association of Municipalities (WAM), provided a handout to the Committee following the annual convention of WAM (see Exhibit M-1). The handout contained several resolutions passed by the WAM convention regarding funding sources for municipalities.

ADJOURNMENT

Chairman Peck announced the meeting scheduled for July 9 and 10, 2002, will be cancelled. However, the Committee will meet in Cheyenne on August 12 and 13, 2002.

There being no further business, Chairman Peck adjourned the meeting at approximately 4:15 p.m.

Respectfully submitted,

Senator Robert A. Peck

Cochairman