STATE OF ALASKA

IN THE MATTER OF: Case No. 19-OTA-97

R & J SEAFOOD

DECISION

R & J Seafood appeals the denial of its claim for refund of the 1996 Fisheries Business Tax (FBT) that R&J paid on salmon that was custom processed for R&J by another fisheries business. This decision affirms the determination of the Department of Revenue (DOR) that R&J is liable for the tax.

David LeBlond, Appeals Officer, represented the Department of Revenue (DOR).  Randy Meier, Vice-President of R&J Seafood, represented R&J.

FACTS AND PROCEEDINGS

R&J Seafood operates an onshore processing facility in the Kenai area. R&J buys raw salmon from Cook Inlet fishermen, processes the fish and then sells the product. During a normal fishing season R&J can’t process all the fish that it takes in so R&J contracts with other local processors to process the excess.

During the 1996 season R&J contracted with Pacific Eagle Seafood (PE) for processing of 215,200 pounds of salmon. Under that agreement PE did 100% of the processing. R&J delivered salmon in the round to PE.  PE butchered, cleaned, glazed, froze, and boxed the fish for 35 cents per pound. This full-processing price reflected a volume discount offered by PE, a new processor.

The agreement called for R&J to pick up all of the processed fish in vans at the PE facility. R&J would then send the fish to Seattle for sale by R&J’s broker.  PE wanted to sell the processed salmon itself but R&J refused because R&J did not have confidence in PE’s marketing ability.

But the deal in practice differed from the deal on paper.  PE actually sold approximately one half of the total contract volume instead of returning it to R&J for sale. R&J has obtained a judgment in a civil action against PE concerning the disposition of the fish.

The agreement between R&J and PE did not specifically provide for payment of the FBT.  R&J assumed PE would pay the tax because PE did the first and only processing of the fish.  R&J read the FBT statutes to require the fisheries business that actually processes the fish to pay the tax.

During the 1996 fishing season R&J also contracted with Pacific Star Seafood for processing of an additional 77,133 pounds of salmon that neither R&J or PE could handle. The terms of the agreement with Pacific Star were the same as the terms in the PE contract except that the prices differed. The price for processing by Pacific Star was approximately 42 cents per pound.  R&J and Pacific Star had discussed the FBT and agreed that R&J would pay the tax.

Before filing the 1996 FBT return, Randy Meier of R&J called DOR for advice regarding FBT liability when R&J contracted with another company for the processing.  Meier spoke with Nestor Catli, a tax examiner in the Income and Excise Audit Division of DOR.  Meier understood Catli to say that the company that first actually processes the fish pays the tax.   Based on this understanding of the law, R&J excluded the fish processed by PE and Pacific Star in calculating its FBT liability in 1996 but reported for information purposes the volume and value of the fish processed by those two processors.

On reviewing R&J’s 1996 FBT return, a DOR tax examiner checked to see whether PE and Pacific Star had paid the FBT on the fish that they processed for R&J. They had not. PE did not file a 1996 FBT return. Pacific Star deducted the value of the fish processed for R&J in computing its own FBT liability.

On June 2, 1997, DOR assessed R&J $13,176.10 in FBT attributable to the fish processed for R&J by PE and Pacific Star. R&J paid the assessed amount, plus interest, on July 31, 1997. Two weeks later R&J requested a refund of the taxes attributable to the custom processed fish. The refund was denied the next day.

On September 23, 1997, R&J appealed the refund denial by requesting an informal conference to be conducted in person in Anchorage.  On November 20,1997, the DOR Appeals Officer assigned to conduct the conference sent R&J a letter explaining DOR’s position on the issue of tax liability and asking R&J to contact him to schedule an in-person conference if R&J wanted to discuss the letter.

A month passed and R&J did not contact the Appeals Officer. On December 23, 1997, the Appeals Officer sent a letter informing R&J that he had upheld the denial of the refund claim for the reasons explained in the November 20 letter. Later, after the Appeals Officer received notice of R&J’s appeal to the Office of Tax Appeals, the parties did confer in person but were unable to resolve the issue of tax liability. The letters dated December 23 and November 20 constitute the Informal Conference Decision for the purpose of this appeal.

R&J filed a timely notice of appeal in the Office of Tax Appeals on January 21, 1998. R&J appeals the issue of FBT liability for the salmon processed by PE. R&J does not dispute its FBT liability for the fish processed by Pacific Star.

A scheduling conference was held On February 26, 1998, by telephone. An evidentiary hearing was held in Anchorage on March 17, 1998. The record closed at the end of the hearing.¹

DISCUSSION

AS 43.75.015 levies a fisheries business tax on the value of all fish processed during the tax year.  The fisheries business that "first actually and physically processes" the fish is liable for the entire tax. But the statute also provides that in determining this tax liability, a fisheries business may deduct the value of fish that are processed for other fisheries businesses.

Another section of the FBT statutes, AS 43.75.100, provides that a person who acquires fish "that has not been subject to the tax imposed in AS 43.75.015" is liable to pay that tax if the person transports the fish outside Alaska for sale or processing or has the fish processed by a fishery business in Alaska.

R&J contends that PE is liable for the FBT on all the salmon that R&J delivered to PE for processing because PE is the fishery business that actually processed the fish. R&J reasons that the proviso in AS 43.75.015 allowing a fishery business to deduct the value of fish processed for another fishery business is irrelevant here because PE did not claim a deduction or even file a FBT return. R&J contends that AS 43.75.100 is inapplicable here because the salmon that R&J delivered to PE for processing was subject to the FBT when PE processed it.

DOR has a different interpretation of the FBT statutes.  DOR contends that a processor is liable for the entire FBT when it has fish custom-processed by another fisheries business that does not pay the tax.

DOR’s statutory interpretation is set out in the FBT regulations. The regulations define a "custom processor" as a fisheries business that does not own the fish that it is processing.²  15 AAC 75.030 clarifies who must pay the FBT when custom processing is involved. For tax years through 1980, the fisheries business that first actually processes, or partly processes, the fish is liable for the tax. For subsequent tax years, however, the rule is different.  For tax years after 1980 the fisheries business that first actually processes the fish or has the fish processed by another fisheries business in state is liable for the entire tax on that fish. The regulation explicitly states that a custom processor is not liable for the tax on fish that is processed for another fisheries business.³

The plain language of the regulation requires no interpretation.  The next step is to apply the regulation to the facts of this case.  Since the tax year at issue here is 1996, tax liability under the regulation depends on whether PE and Pacific Star were custom-processors in relation to R&J.  By definition, a custom processor is a fisheries business that does not own the fish it is processing. PE and Pacific Star are fisheries businesses. The uncontroverted evidence established that R&J contracted with PE and Pacific Star to process fish for R&J and to return the processed fish to R&J for marketing. Under these processing agreements PE and Pacific Star did not own the fish that they processed.  On these facts, PE and Pacific Star are custom processors and are not liable for the tax. The regulation clearly requires R&J to pay the entire FBT on the fish that was custom-processed, although R&J did none of the actual processing itself.⁴

Although R&J’s liability for the FBT is clear under the regulation, this is not the end of the analysis.  Implicit in R&J’s appeal is the issue of whether the regulation is valid.  The validity of 15 AAC 75.030 depends on whether it is consistent with the FBT statutes and reasonably necessary for their enforcement. See AS 43.05.080; AS 44.62.030.

When reviewing the validity of a tax regulation, the Administrative Law Judge (ALJ), like a court, applies the independent judgment standard of review because the validity of the regulation is a question of statutory interpretation.⁵   However, an administrative regulation is presumed to be valid and the court will not substitute its judgment for that of the agency with respect to the efficacy or wisdom of the regulation. State of Alaska, Dept. of Revenue v. OSG Bulk Ships, Inc., Supreme Ct. Opinion No. 4951 (Feb. 20, 1998), __ P.2d __(Alaska 1998), citing Anchorage School District v. Hale, 857 P.2d 1186, 1888 (Alaska 1993).

15 AAC 75.030, the regulation at issue, interprets and implements AS 43.75.015 (c).  That statute provides:

A person engaging or attempting to engage in a fisheries business who first actually and physically processes the fishery resource, or a person who purchases a fishery resource that is frozen from a person excluded by As 43.75.017 from liability for the tax, s liable for and shall pay to the department the entire tax imposed by this section.  In determining this tax liability, the person may deduct from the value of the fishery resources processed the value of fishery resources processed for other fisheries businesses.  A person taking the deduction authorized by this subsection shall report all information relating to the deduction in accordance with regulations adopted by the department.

DOR’s  position is a reasonable interpretation of the language of AS 43.75.015 which allows a fisheries business to deduct "the value of fishery resources that are canned or processed for other fisheries businesses."   This language implies that the processor actually doing the processing does not own the resource that it is processing.  If the actual processor did own the resource it would not be processing for another.

DOR’s interpretaton  is also consistent with  AS 43.75.100 and with the legislative history.  The legislature amended AS 43.75.015 in 1981 to allow a deduction for the value of fish that are processed for other fisheries businesses.  Prior to the 1981 amendment the statute expressly prohibited such a deduction.⁶  In 1981 the legislature also amended AS 43.75.100 to provide that a person who has fish processed by a fisheries business in state is liable for the section 15 tax upon acquiring fish that has not been subject to the tax.⁷

 Considering these two statutory sections together in light of the legislative history, it is reasonable to conclude that the legislature intended to place liability for the FBT on the fisheries business that actually processes the fish, with limited exceptions.  One exception is when the fisheries business that actually processes the fish is outside Alaska and thus not subject to the tax .  Another exception is when the actual processor is simply custom-processing the fish for another fisheries business in the state. In these situations the legislature intended to impose the tax liability on persons other than the actual processor.  When the first processing occurs out of state, the person who transports or sells the fish for outside processing must pay the tax.  Effective in 1981, when a fisheries business has its fish processed by another fisheries business, the owner of the resource is liable for the tax. if the custom-processor does not pay it. .  The owner of the resource is the fisheries business that purchased the raw fish from the fishermen and will sell the processed fish.  It makes sense to place liability on the owner because the owner has the documentation regarding the price it paid for the raw fish and the tax is based on the price, or the market value, of the raw fish.

This is the scheme that the legislature chose to insure that some fisheries business is accountable for paying the tax on the value of all fisheries resources harvested in Alaska. The regulation interpreting AS 43.75.015(c) is consistent with the statutory scheme and reasonably necessary to implement it.  Under the regulation, liability for the FBT in the situation where two processors are involved turns on ownership of the fish.  A processor who has its fish processed in whole or in part by another processor is liable for the entire FBT.  A custom-processor, which by definition does not own the fish that it processes is not liable for the FBT on that fish.  I conclude that the regulation is valid.

CONCLUSION

For the reasons stated above, I conclude that R&J is liable for the FBT on the fish that was custom-processed for R&J. The Informal Conference Decision disallowing R&J’s refund claim for the FBT on the custom-processed fish is affirmed.

This is the hearing decision of the Administrative Law Judge under AS 43.05.465 (a). Unless reconsideration is ordered, this decision will become the final administrative decision 60 days from the date of service of this decision.  A party may request reconsideration in accordance with AS 43.05465(b) within 30 days of the date of service of this decision.

When the decision becomes final, the decision and the record on appeal become a public record unless the administrative law judge has issued a protective order requiring that specified parts of the record be kept confidential. See, AS 43.05.470.  A motion for a protective order, showing good cause why specific information in the record should remain confidential, may be made within 30 days of the date of service of this decision.
 

Dated this 19th day of June 1998.
 
       Shelley Higgins
       Administrative Law Judge

Footnotes:

¹ The evidentiary record consists of the testimony of Randy Meier, Vice President of R&J, and DOR exhibits A through F. The findings of fact are based on a preponderance of the evidence. See, AS 43.05.435. (return to text)

² The FBT regulations are found in 15 AAC 75.010-. 300. The definitions are found in 15 AAC 75.300. (return to text)

³ 15 AAC 75.030. LIABILITY FOR THE TAX.

• The person engaging in a fisheries business who first actually and physically processes a fisheries resource is liable for and shall pay to the department the entire tax imposed under AS 43.75.015. If two or more persons perform separate steps in the processing of the same fisheries resource, the first person who performs a processing step is liable for and shall pay the tax. This section applies to the period June 1, 1979 through December 31, 1980.
• For periods after December 31, 1980, the person engaging in a fisheries business who first actually and physically processes a fisheries resource or who has a fisheries resource processed by a fisheries business inside the state, or the person who purchases a fisheries resource that is frozen from a person excluded by AS 43.75.017 from liability for the tax, is liable for and shall pay to the department the entire tax imposed under AS 43.75.015. In determining the tax liability, the person who first actually and physically processed a fisheries resource may deduct from the value of the fisheries resource processed the value of a fisheries resource processed for another fisheries business. If a person custom processes a fisheries resource for another fisheries business, the custom processor is not liable for the tax, but if he custom processes for someone other than another fisheries business, the custom processor must pay the tax.

⁴ Indeed, R&J acknowledged FBT liability on the fish processed by Pacific Star by dropping its appeal regarding the tax attributable to that fish. But R&J maintains that it should not have to pay the tax on the fish that PE processed. R&J's refusal to pay the FBT on the fish processed by PE stems in part from the fact that PE actually sold some of the processed fish itself contrary to the agreement, which called for PE to return the product to R&J for marketing. R&J's consternation at having to pay taxes on the fish that PE failed to return to R&J is understandable. But PE's breach of the custom-processing agreement does not relieve R&J of liability for the FBT. R&J's recourse is against PE, not DOR. In fact, according to Mr. Meier's testimony, R&J has already filed an action against PE and obtained a judgment, presumably for the value of the fish that PE sold. (return to text)

⁵ The administrative law judge applies her independent judgment in deciding a question of law, including statutory interpretation. See, AS 43.05.435. (return to text)

⁶ Section 6 chapter 117 SLA 1981. (return to text)

⁷ AS 43.75.100 , as amended by section 8 chapter 117 SLA 1981, reads:

Tax imposed on taking of fishery resource.
(a) A person taking, purchasing, or otherwise acquiring a fishery resource that has not been subject to the tax imposed in AS 43.75.015 is subject to the tax levied in AS 43.75.015 on the value of the fishery resource if the person

• transports the fishery resource to a point outside the taxing jurisdiction of the state for subsequent processing or sale outside the taxing jurisdiction of the state;
• sells the fishery resource outside the taxing jurisdiction of the state; or
• has the fishery resource processed by a fisheries business in the state.