Joint Revenue Committee Minutes for Meeting September 27 & 28, 2007

Committee Meeting Information

September 27^th and 28^th, 2007

State Capitol, Room 302

Cheyenne, Wyoming

Committee Members Present

Senator Jim Anderson, Co-Chairman

Representative Rodney "Pete" Anderson, Co-Chairman

Senator Cale Case

Senator Kit Jennings

Senator Jayne Mockler

Senator Tony Ross

Representative Ken Esquibel

Representative Mary Gilmore

Representative Tom Lubnau

Representative Mike Madden

Representative Mark Semlek

Representative Tom Walsh

Representative Dave Zwonitzer

Committee Members Absent

Representative David Miller

Legislative Service Office Staff

Mark Quiner, Assistant Director

Dean Temte, Legislative Analyst

Josh Anderson, Research Associate

Others Present at Meeting

Please refer to Appendix 1 to review the Committee Sign-in Sheet
for a list of other individuals who attended the meeting.

Executive Summary

The Committee met for two days in Cheyenne Wyoming. The Committee heard testimony on the excise tax exemption on food, collection of sales and use tax on motor vehicle transfers, natural gas development, the veteran's exemption, natural gas valuation for producer processed natural gas, the streamlined sales tax agreement and the reports due to the Committee in statute.

The Committee directed staff to prepare a bill that would provide backfill to local governments for the tax exemption on food and to prepare a bill that would codify and repeal certain reports to the Committee. The Committee voted to sponsor the two bill drafts presented on motor vehicle transfers and to sponsor the bill draft presented on producer processed natural gas.

The Committee will vote by postcard ballot on the bills they directed staff to prepare. The Committee does not intend to meet again during this interim.

Call To Order (9/27/2007)

Co-Chairman Senator Anderson called the meeting to order at 8:30 am. The following sections summarize the Committee proceedings by topic. Please refer to Appendix 2 to review the Committee Meeting Agenda.

Approval of Minutes

Minutes from the June 12 and 13 Committee meeting were approved with no changes.

Excise Tax Exemption on Food

Mr. Dan Noble of the Department of Revenue addressed the Committee regarding the excise tax exemption on food. He provided two handouts to the Committee (see Appendix 3 and Appendix 4 for a copy of the handouts) which showed the estimated loss of revenue to the counties related to the exemption on food. Mr. Noble noted that the data is to some extent unreliable because any increase in activity within a county would mask the actual loss. Mr. Noble stated that a valid method for reimbursement would be to look at actual loss or the industry average based on the North American Industrial Classification (NAICS) and use the higher number. The recommendation to use a projection in lieu of actual historical data was to recognize that there was some loss and that while the projection is not accurate it is a good starting point for calculating how much revenue was lost. Mr. Noble also noted that the data shown only reflects the first full year of the exemption.

Mr. Joe Evans of the Wyoming County Commissioners Association addressed the Committee regarding the food tax. Mr. Evans provided a copy of a resolution to the Committee (see Appendix 5 for a copy of the handout). Mr. Evans stated that counties and local governments could not afford the exemption and the purpose of the backfill was to make them whole. Mr. Evans also stated that the Wyoming County Commissioners Association was neutral on the proposal supported by the Wyoming Association of Municipalities. In response to a question, Mr. Evans stated that distribution is key and that the numbers provided by the Department of Revenue were coming closer to what the actual revenue losses probably are. In response to a question, Mr. Evans said that tourism counties would be more affected if the system were based on a per capita basis than those counties without as much tourism.

Mr. Mark Harris and Mr. George Parks of the Wyoming Association of Municipalities (WAM) provided a proposal to the Committee of how to distribute the funds and a spreadsheet of the proposed distributions (see Appendix 6 for a copy of the handout). Mr. Harris stated that the proposal was made in order to help make the local governments whole although they recognize that it will not be perfect. The proposal would provide for a 3.385% increase in the share of the sales tax that would go to local governments. Mr. Harris also stated that the proposal should make the local governments whole both in amount and character because of the dependability of the revenue stream that was taken away with the sales tax exemption on food.

Mr. Noble of the Department of Revenue stated that the proposed distribution from WAM added some complexity to the distribution system because the proposal treats counties differently depending on whether the county imposed the 5^th penny tax.

Mr. Joel Schell of the Wyoming County Treasurers' Association stated that the complexity of the issue argues against a single formula and that historical data will show that a formula based on number of people would not work. Mr. Schell also noted that while they liked the figures provided by the Department of Revenue, the figures were likely understated. In response to a question, Mr. Schell said in order to quantify impact you can look at trends in the value of that revenue stream to overall revenue of the local government. Mr. Schell also stated that he thought it was important for this Committee to act in order to show their decision to the other committee, it is important

Ms. Sarah Goren of the Equality State Policy Center addressed the Committee and stated that while they are committed to the backfill to county and municipal governments, at some point it would be necessary to draw a line because it would not be practical to try to determine how much each county would have lost in sales tax twenty years from now.

Mr. Noble stated that as time goes on the Department of Revenue can only look at 2006 as the base year (the last year sales and use taxes were imposed on groceries). Going forward the Department would need to use the consumer price index to adjust the figures and that any figure is going to be an estimate. Mr. Noble stated that right now the fairest value is to use an estimate but in the future the Department would likely need to use a percentage.

Representative Anderson made a motion to draft a bill that would use the actual loss or the industry average as calculated by the department, whichever is greater with an optional inflation factor figured in. After discussion the motion carried.

Motor Vehicle Transfer: Collection of Sales/Use Tax

Mr. Josh Anderson of the LSO addressed the Committee and presented two drafts related to motor vehicle taxes, 08LSO-0094 entitled Vehicle sales and use tax and 08LSO-0106 entitled Installment payment agreements on tax assessments (see Appendix 7 and Appendix 8 for copies of the draft legislation).

Following discussion, Senator Ross moved the Committee sponsor the draft (08LSO-0106.W1) as a Senate File. The motion passed with 10 ayes, 3 noes.

Mr. Noble of the Department of Revenue stated the purpose of 08LSO-0094.W1 was to come up with a draft that would solve a lot of the problems that the Department had observed and to have car dealers collect tax in order to put vehicles on equal footing with motorcycles and boats. Mr. Noble stated that under the current statutes the tax is due at the time of purchase for motorcycles, even for out of state sales.

Ms. Julie Freese of the Wyoming Association of County Clerks provided a handout to the Committee of a resolution by the Wyoming Association of County Clerks that the Wyoming Association of County Officers supports passage of legislation to require motor vehicle dealers to collect sales tax at the time of sale based on the residency of the purchaser (see Appendix 9 for a copy of the resolution). Ms. Freese stated that it would be easier to just title everything and that even though it may mean more work for the county clerks, they support that change. Ms. Freese also stated requiring the buyer and seller to attest to the sales price and sign the title would not mean anything to the clerks but she was concerned about old titles that do not have a place for such information.

Ms. Marsha Allen of the Wyoming Auto Dealers Association (WADA) provided a handout to the Committee stating the elements that the WADA would like to see in a bill that would change the sales tax collection to a point-of-sale system (see Appendix 10 for a copy of the handout) Ms. Allen stated that the auto dealers would like to see a 5% vendor fee for the expense of collecting the tax.

The Committee discussed the draft legislation and made several amendments. W.S. 31-2-104(h)(ii) will be amended to include a line for the Buyer or Transferee's signature. On page 3, line 11 after "vehicle title" add "or bill of sale". Page 3, line 12 after "price paid" insert "and date of sale". On page 4 lines 20 and 21 delete forty-eight (48) hours and insert "thirty (30) days". On page 7 line 4 delete "was paid by the purchaser" and insert "has been paid".

Co-chairman Representative Anderson moved that the Committee sponsor the draft (08LSO-0094.W1) as a House Bill. The motion passed with a roll call vote of 11 ayes, 3 noes.

Questar – Natural Gas Information

Mr. Shane Schulz and Mr. Paul Matheny of Questar made a presentation to the Committee (see Appendix 11 for a handout of the presentation). The presentation discussed natural gas development in the Pinedale Anticline Field and the wildlife and environmental considerations involved with the development. Mr. Schulz stated they are interested in the support of the Committee but they do not require any legislation at this time. Mr. Matheny stated that cleaner burning engines for drilling rigs were possible and that if the company knew it would have the benefit of long term access it could afford the large investment required to switch to those cleaner burning engines.

Veterans Exemption

Mr. Marvin Applequist of the Department of Revenue addressed the Committee regarding the veterans exemption for property tax and provided handouts to the Committee of data related to the cost of the veterans exemption (see Appendix 12 and Appendix 13 for a copy of the handouts). Mr. Applequist stated that the amount appropriated was approximately $1,000,000 short.

Ms. Sharon Garland of the Wyoming State Treasurer's Office stated that they did not realize they would need a higher amount than what was appropriated last session and that the amount needed could be a much larger amount in the next biennium.

Mr. Dean Temte of the LSO suggested that it may be possible to get the money from another appropriation with extra funds through the B-11 process in the budget.

Meeting Recess

The Committee recessed at 5:00pm.

Call To Order (9/28/2007)

Co-Chairman Senator Anderson called the meeting to order at 8:30 am. The following sections summarize the Committee proceedings by topic.

Natural Gas Valuation – Producer/Processed Gas

Mr. Ed Schmidt of the Department of Revenue and Mr. Bruce Hinchey of the Petroleum Association of Wyoming addressed the Committee regarding draft legislation 08LSO-0041.W2, entitled Natural gas valuation (see Appendix 14 for a copy of the draft). Mr. Schmidt noted that W.S. 39-14-203 may be the most litigated statute in Wyoming and there is a fairly large body of law on the issue of the valuation of producer-processed natural gas. Mr. Hinchey noted that it was an arduous process but that this draft was something that everyone can live with. Mr. Schmidt noted that the issue was how to determine the value of the producer-processed natural gas.

Mr. Craig Grenvik of the Department of Revenue provided a handout to the Committee regarding the modified netback valuation method (see Appendix 15 for a copy of the handout). In the modified netback method the value of the natural gas will be the sales price less transportation and processing costs, arms-length transportation fees, overhead that would be billed to others and a return on investment. Mr. Grenvik stated that the return on investment component is based on studies done in railroad and property taxes.

Mr. Schmidt stated that under the draft proposal the Department would select among the valuation methods listed, (the current practice is to select comparable value), and if they cannot use comparable value, the Department would like to use modified netback.

Mr. Grenvick noted that under the draft proposal, if a company uses the modified netback valuation method, they will make two calculations -- the proportionate profits and modified netback methods, and report on the higher of the two methods. Then the company will be required to use the higher of the two methods to pay the production taxes for that year.

Mr. Hinchey noted that under the draft proposal the proportionate profits calculation is a floor, and a company would pay that amount if it is higher than the amount provided by the modified netback valuation.

Mr. John McKinley, an attorney representing Sublette County, stated that he had a few concerns with the draft legislation. He noted that while is was a good compromise between industry and the Department, he felt it may provide for unfair tax deductions for producer-processed natural gas that other oil and gas producers do not have. Mr. McKinley also noted that the bill allows for some post processing infrastructure costs below the plant tailgate.

Mr. Schmidt stated that he was aware of the concerns expressed by Mr. McKinley made and that those were positions that the Department has advocated for in the past but that the draft legislation was a compromise. In response to a question, Mr. Schmidt noted that the methodology for rate of return is complicated, but a tried and true method for regulated industries, pipeline, railroads. Mr. Schmidt provided a handout to the Committee explaining some of the rate of return issues (see Appendix 16 for a copy of the handout). Mr. Schmidt noted that the percentage is critical as a 1 percent change results in approximately $2.2 million in revenue.

In response to a question Mr. Grenvick stated that the draft would allow any costs that occur after the point of valuation post tailgate in recognition that the producer has to make an investment in those types of facilities as well.

In response to a question Mr. McKinley stated that as the draft was presented it is better than the current statutes, but that there is still some concern about the effective date of the legislation and the rate of return component.

Ms. Sara Goren of the Equality State Policy Center provided a handout to the Committee of a suggested reporting provision to add to the legislation (see Appendix 17 for a copy of the handout). Ms. Goren stated that the reporting provision would help to flag any issues with the changes and prevent future problems.

Mr. Schmidt noted that the Department would not be opposed to the inclusion of a reporting requirement. Mr. Schmidt provided a handout to the committee of the 8 issues that had been identified at the May 15, 2007 meeting of the Committee (see Appendix 18 for a copy of the handout). Mr. Schmidt noted that the deduction for retired assets would be if the asset was permanently abandoned under generally accepted accounting principals.

Representative Walsh moved that the Committee sponsor the bill as a House Bill. The Committee made several amendments to the draft bill. On page 6, line 16 after "processing" insert "and", after "costs" insert ","; on page 6, line 39 delete "taxable value" and insert "valuation method"; and in the appropriate place insert the reporting requirement as suggested by Ms. Sarah Goren of the Equality State Policy Center, amended to include the language "subject to confidentiality restrictions".

Following discussion, the motion passed with a roll call vote of 13 ayes.

Streamlined Sales Tax Agreement

Mr. Dan Noble of the Department of Revenue addressed the Committee regarding the streamlined sales tax project which deals with remote commerce that is not taxed by the states. Mr. Noble noted that this would include sales from catalogs, where because the laws of the states are so varied that courts have decided that with no presence in a state the seller is not required to collect the tax. This results in a loss of revenue to the states of as much as 78 million per year. Mr. Noble stated that there is still a lot to do to implement the changes suggested by the project and that one of the main issues is to switch form origin based to destination based sourcing. Origin sourcing is based on the tax rate of the seller’s location while destination sourcing is based on the buyer’s tax rate, which makes it more complicated for the seller. Mr. Noble noted that right now there is a voluntary system and that there are currently 200 vendors who volunteer to collect our tax which has resulted in revenue of $881,000 so far and is on pace for approximately $1mill per year.

Reports

Mr. Josh Anderson of the LSO addressed the Committee concerning reports required by law to be submitted to the Committee and provided a handout to the committee listing the reports currently required by statute (see Appendix 19 for a copy of the handout). Senator Case moved that staff draft a bill which would repeal the reports required in W.S. 39-14-105(d), 39-14-202(a)(ix) and 9-2-2003(c), to amend the report required on 39-17-109(d)(v) and to codify the reports required in 2007 Session Laws Chapter 27 and 2006 Session Laws Chapter 14. The motion carried.

Meeting Adjournment

There being no further business, Co-Chairman Representative Anderson adjourned the meeting at 12:00pm.

Respectfully submitted,

Senator Anderson, Co-Chairman Representative Anderson, Co-Chairman

Appendix	Appendix Topic	Appendix Description	Appendix Provider
1	Committee Sign-In Sheet	Lists meeting attendees	Legislative Service Office
2	Committee Meeting Agenda	Provides an outline of the topics the Committee planned to address at meeting	Legislative Service Office
3	Food Tax Exemption	Impact of Food Tax Exemption	Department of Revenue
4	Food Tax Exemption	Distribution of Funds to Local Governments	Department of Revenue
5	Food Tax Exemption	Resolution of WCCA	Wyoming County Commissioners Association
6	Food Tax Exemption	Local Governments and the Food Tax Exemption	Wyoming Association of Municipalities
7	Motor Vehicle Transfer	08LSO-0106.W1	Legislative Service Office
8	Motor Vehicle Transfer	08LSO-0094.W1	Legislative Service Office
9	Motor Vehicle Transfer	Resolution from 2007 WACO Convention	Wyoming Association of County Clerks
10	Motor Vehicle Transfer	Sales Tax Collection at the Point of Sale	Wyoming Auto Dealers Association
11	Natural Gas Information	Pinedale SEIS	Questar
12	Veterans Exemption	Valuations and Benefits	Department of Revenue
13	Veterans Exemption	Property Tax Relief Program	Department of Revenue
14	Natural Gas Valuation	08LSO-0041.W2	Legislative Service Office
15	Natural Gas Valuation	Modified Netback Method	Department of Revenue
16	Natural Gas Valuation	Rate of Return Issues	Department of Revenue
17	Natural Gas Valuation	Suggested Reporting Provision	Equality State Policy Center
18	Natural Gas Valuation	8 Issues from May 15, 2007 Meeting	Department of Revenue
19	Reports	Reports to Revenue Committee	Legislative Service Office