Opinion ID: 1161101
Heading Depth: 3
Heading Rank: 2

Heading: Whether DOR Exceeded Its Statutory Authority by Adopting 15 AAC 20.110(d)

Text: DOR next argues that the superior court erred in holding that DOR exceeded its authority by promulgating a regulation limiting the statutory investment tax credit. [14] The legislature enacted the investment tax credit as part of the ANITA by adopting 26 U.S.C. § 38 by reference. AS 43.20.021(a). Section 38 provided an investment tax credit for taxpayers who invested in tangible personal property used in a trade or business. [15] The legislature adopted several statutory limitations on the credit. It limited the credit for corporations to eighteen percent of the federal credit which was attributable to Alaska. AS 43.20.021(d). [16] It also limited the credit to the amount of federal credit on the first $20,000,000 of qualified investment ... put into use in the state for each taxable year. AS 43.20.036(b). [17] DOR promulgated an investment tax credit regulation, 15 AAC 20.110, and in doing so cited as authority AS 43.05.050, AS 43.20.021, and AS 43.20.036. Subsection (d) of that regulation treated transportation equipment first used in Alaska as new property. [18] It also prorated qualified expenditures by comparing the number of days the property was used in Alaska and the number of days it was used elsewhere. OBS claimed investment tax credits, calculated as eighteen percent of the first $20 million of qualified investments put into use for each taxable year, and prorated under 15 AAC 20.110(d) by comparing days of in-state and out-of-state use. The auditor disallowed any credit for vessels that had not visited Alaskan ports on their initial voyages, per 15 AAC 20.110(d). On appeal by OBS, the superior court held that DOR had exceeded its authority by promulgating a regulation containing first use and pro rata apportionment limitations in addition to the limitations imposed by AS 43.20.021(d) and AS 43.20.036(b). When reviewing the validity of an agency's regulations, we initially determine whether the agency had the authority to adopt such regulations. This determination is a question of law to which we apply our independent judgment. See Warner v. State, Real Estate Comm'n, 819 P.2d 28, 31 (Alaska 1991). To be within the agency's grant of rule-making authority, a regulation must be consistent with and reasonably necessary to carry out the purposes of the statutory provisions conferring rule-making authority on the agency. State, Dep't of Revenue v. Cosio, 858 P.2d 621, 624 (Alaska 1993) (citations omitted). This test ensures that in promulgating the regulations the agency did not exceed the power delegated to it by the legislature. Id. We next determine whether the regulation is reasonable and not arbitrary. Id. We accord an administrative regulation a presumption of validity; the party challenging the regulation bears the burden of demonstrating its invalidity. Anchorage Sch. Dist. v. Hale, 857 P.2d 1186, 1188 (Alaska 1993) (citations omitted). Further, we will not substitute our judgment for that of the agency with respect to the efficacy of a regulation nor review the `wisdom' of a particular regulation. Id. (citation omitted). However, we will apply the substitution of judgment standard of review when reviewing the validity of an administrative regulation because this is a question of statutory interpretation. Id. at 1188 n. 3. Whether 15 AAC 20.110(d) is valid depends here on whether it is consistent with the tax credit statutes and reasonably necessary for their enforcement. See AS 43.05.080; AS 44.62.030. [19] See also Cosio, 858 P.2d at 624. Citing the plain language of AS 43.20.036(b), its legislative history, and canons of statutory construction, DOR contends that 15 AAC 20.110(d) is consistent and necessary because the regulation simply clarifies when a credit is allowed for transportation property not used exclusively in the state. OBS argues that 15 AAC 20.110(d) is unnecessary and inconsistent with the statutes providing for the credit. It asserts that the regulation's pro rata apportionment requirement results in a double reduction of the credit, because the statutes already limit the credit to property used in Alaska. Implicit in OBS's argument is the assertion that a taxpayer is entitled to the full credit regardless of the amount of time the property is used in Alaska.
Before it was amended in 1981, AS 43.20.036(b) provided a credit for any section 38 property, and did not limit the credit to property put into use in Alaska. The 1981 amendments were introduced in Senate Bill 524, and added the requirement that the equipment or property be put into use in the state. Senate Bill (S.B.) 524, 12th Leg., 1st Sess. (1981). The House Finance Committee also adopted a letter of intent which stated that HCSSB 524(Fin) provides an increase in the investment tax credit allowed for in-state investments for corporations doing business in Alaska. 1981 House Journal 2009 (June 8, 1981). Thus, the legislature intended to encourage commercial investments in Alaska in order to benefit Alaska's economy.
The tax credit statutes have two features salient here. [20] Alaska Statute 43.20.021(d), a subsection of the statute that adopted the IRC section 38 investment tax credit by reference, limits the state credit to a percentage of the federal credit which is attributable to Alaska. Alaska Statute 43.20.036(b) limits the credit to a qualified investment put into use in the state for each taxable year. The latter statute can reasonably be read to require that the equipment first be used in Alaska as a qualification for the credit. Both statutes can reasonably be read to require a determination of the extent to which the credit is attributable to Alaska or the investment is put into use in Alaska. Such a determination necessarily involves distinguishing use in Alaska from use elsewhere. Absent such a determination, a taxpayer would be entitled to a full tax credit in Alaska even though the property received little use in Alaska. From the legislative history and the statutory language put into use in the state, it is clear that the legislature intended the credit to apply to property put into use within the state during the taxable year. The amendment was adopted in order to benefit Alaska's economy by encouraging investment in the state. Thus, DOR's interpretation of the language put into use in the state as first use clarifies an ambiguity left by the statutory language  the meaning of put into use in the state  in a manner consistent with legislative intent. The first use requirement guarantees that the equipment or property is not used up outside the state, and is not brought just momentarily to the state at the end of the taxable year. [21] DOR has interpreted the first use requirement for transportation equipment to mean an initial voyage in which Alaska was a port of call. DOR's adoption of the pro rata apportionment formula for transportation equipment and property is also consistent with the statutory purpose. Without such a requirement, owners of interstate transportation equipment could receive a full tax credit from every state in which their property was used in a given year. The limited tax credit based upon days in port also fairly determines the contribution the taxpayer is making to Alaska without giving credit for investment outside of the state. We find that 15 AAC 20.110(d) is consistent with and reasonably necessary to implement the provisions of AS 43.20.021(d) and AS 43.20.036(b). [22] Our conclusion is also consistent with the following canon of construction: Exemptions are narrowly construed against the taxpayer. State, Dep't of Revenue v. Alaska Pulp Am., Inc., 674 P.2d 268, 276 (Alaska 1983). In effect, DOR's regulation interpreted the tax credit statutes. DOR did not exceed its authority in doing so. We conclude that the superior court erred in holding to the contrary.