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Does Hawker amendment tip scales to oil companies during state tax audits?

Pat Forgey

State auditors checking oil company tax returns will have to use the industry's numbers, not their own, under the oil tax cut bill now under consideration by the Alaska Legislature.

Sometime after 1 a.m. Thursday morning, bleary-eyed lawmakers voted on the 32nd amendment to Senate Bill 21 in the House Resources Committee. That amendment, pushed by oil-industry friendly lawmakers, changed how the state Department of Revenue's staff is allowed to audit oil company tax returns.

"It's almost mind-boggling," that legislators would consider such a change, said Rep. Beth Kerttula, D-Juneau, and a former oil and gas attorney with the Alaska Department of Law. She was speaking after the meeting.

The change tells the state auditors that they are required to use what's known as "joint interest billings" created by the industry to get the numbers with which to calculate industry taxes.

The amendment was proposed by Rep. Mike Hawker, R-Anchorage. His wife is a business and financial analyst for ConocoPhillips, the state's largest oil producer. According to Hawker's financial disclosure filings, she earned between $100,000 and $200,000 from her ConocoPhillips job last year.

The committee that amended SB 21 to include the new requirement was chaired by Rep. Eric Feige, R-Chickaloon. He is married to the Alaska general manager of Linc Energy, which is developing the Umiat oil field. She was paid between $100,000 and $200,000 last year, Feige reported.

Hawker said it was only fair to use the numbers created by the industry for the joint interest billings because they were each checked by their partners and filed with the Internal Revenue Service.

"Not only are they auditable by the IRS, they have to be certified by the senior management of these companies, in accordance with the Sarbanes-Oxley law," he said.

The Sarbanes-Oxley of 2002 was passed in the wake of the Enron and other scandals in which corporate executives were found to have lied to regulators and stockholders, with harsh punishments for doing so in the future.

"If anyone really thinks the industry colluded on these, I think we're sadly mistaken," Hawker said.

Hawker said the change he was proposing was simply to go back to the audit requirements that existed in 2006, after the Legislature passed the Petroleum Profits Tax, That tax was based on net profits for the first time and it meant that the state had to carefully account for expenses in order to determine the amount of profits to be taxed.

"This is not new language, this is language that existed in the original PPT. It was well crafted, it went through all the legal and professional and legislative review at the time," he said.

The best way to audit companies is with the numbers they provide to each other, to the IRS and regulators, and which they check carefully, he said.

"What could be a more reasonable way of determining a fundamental cost of operation than those costs that are billed from one company to another," he told the committee.

But Kerttula said later that that language had proven flawed when the first PPT tax payments came in and were $800 million less than had been projected. That was because expenses the tax-paying companies claimed were higher than legislators had been led to believe.

That underpayment was as big a factor as the VECO bribery scandal in the decision by the Legislature to adopting the existing ACES tax in 2007, she said.

The ACES provisions that allow the state, not the companies, to determine allowable costs are what Hawker's amendment repeals, and it is retroactive to 2007.

Committee Chair Feige asked for the Department of Revenue’s auditors to address the issue, but first Hawker tried to head off the impact of anticipated criticism.

"I don't think we're going to hear a lot of support for this from these guys," he said.

He said they were regulators, and regulators like to have the power to regulate.

Audit Master John Larson with the department's tax division gave a detailed explanation of how and why the Department of Revenue used its own numbers instead of relying on the industry's joint interest billings. Those are simply "invoices" for the underlying costs, and the state needs to know the underlying costs, he said.

Relying on information provided to the IRS was not adequate to protect the state's interest, he said.

"The IRS audits for income tax, not necessarily for oil and gas production taxes," he said.

Hawker, who noted that he had once been an auditor, disputed the Department of Revenue's auditors, saying they didn't want to use joint interest billings at all. Despite what the state auditors said, Hawker claimed his plan would make them more effective by using the industry's numbers.

"I can't for the life of me see why the agency wants to completely discount them," he said.

His bill changes current state law that says auditors "may" use joint interest billings, so that it now says they "shall" use them. They are allowed to use other information as well.

"This is still leaving a tremendous amount of power with the Department of Revenue," Hawker said.

Finally, Chair Feige asked Larsen whether they would still be able to audit as effectively under Hawker's amendment.

After a long silence, Larsen said. "I think not," and said the amendment would shift the auditing authority from the state to the companies.

The department said it wanted to use the same definition across the North Slope on what was an allowable expenditure and what was not, even if the companies' joint interest agreements accounted for them differently.

Hawker disputed the department testimony, accusing them of providing inaccurate information.

"There is no one here trying to find a backdoor way to allow someone to take an unallowable cost," he said.

Those costs are the critical part to the calculation of the tax, because the higher the company costs, the lower their production tax payments are.

Kerttula said that the state's oil producers have a long history of trying to underpay their taxes, including by falsely claiming higher expenses. Legal settlements for underpaid taxes have provided most of the billions in the Constitutional Budget Reserve, she said.

The House Resources Committee approved Hawker's amendment on a 7-2 party-line vote before going on to pass SB 21 as well. The committee did not get new cost estimates on the latest version of the bill before passage.

On Saturday, the Department of Revenue made public its latest SB 21 cost estimates, listing a cost of $50,000 for drafting new regulations, but no tax revenue lost.

The House Finance Committee began hearings on SB 21 Friday.

Contact Pat Forgey at pat(at)alaskadispatch.com