Legislature(2003 - 2004)

04/16/2003 01:46 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 224                                                                                                            
                                                                                                                                
     "An  Act relating  to a  tobacco product  manufacturer's                                                                   
     compliance    with   certain   statutory    requirements                                                                   
     regarding   cigarette  sales;   and  providing   for  an                                                                   
     effective date."                                                                                                           
                                                                                                                                
MIKE  BARNHILL,  ASSISTANT ATTORNEY  GENERAL,  DEPARTMENT  OF                                                                   
LAW,  testified   in  support   of  the  bill   and  provided                                                                   
information  about  the  legislation.   He  referred  to  the                                                                   
Master  Settlement  Agreement,  initiated  in Alaska  and  45                                                                   
other states  as a result of  the 1998 settlement  of tobacco                                                                   
company  litigation.     The   Master  Settlement   Agreement                                                                   
established  a stream  of revenue that  lasts in  perpetuity.                                                                   
He noted  that Alaska's  most recent  annual payment  was for                                                                   
$17.5 million.                                                                                                                  
                                                                                                                                
Mr. Barnhill stated that the revenue  stream could however be                                                                   
reduced  under  certain circumstances.    He  noted that  one                                                                   
circumstance  was known as  a non-participating  manufacturer                                                                   
(NPM) adjustment.   He explained  that states could  avoid an                                                                   
NPM  adjustment in  two  ways:   first,  by  enacting an  NPM                                                                   
statute,  and second,  by diligently  enforcing the  statute.                                                                   
He referenced Alaska's NPM statute,  located in AS 45.53.  He                                                                   
explained that the statute creates  economic equanimity under                                                                   
the  Settlement  Agreement  between  participating  and  non-                                                                   
participating   manufacturers.      He   pointed   out   that                                                                   
participating  manufacturers  fund the  Settlement  Agreement                                                                   
revenue  stream by  raising  the prices  of  cigarettes.   He                                                                   
stated  that  the  NPM  statute   requires  non-participating                                                                   
manufacturers to  deposit money into an escrow  account based                                                                   
on cigarette sales in the state.   He noted that in FY 01 and                                                                   
02, the amount deposited equaled 1.5 cents per sale.                                                                            
                                                                                                                                
Mr. Barnhill also  addressed the enforcement  of the statute.                                                                   
He  noted that  the Department  of Revenue  sends letters  to                                                                   
non-participating manufacturers  advising them of their legal                                                                   
obligations.   If  compliance  does not  occur after  several                                                                   
letters, the manufacturers are  referred to the Department of                                                                   
Law,  and   a  lawsuit  may  be   filed  if  the   sales  are                                                                   
significant.  He  pointed out the case of a  company in India                                                                   
that did  not comply,  resulting  in a lawsuit  filed by  the                                                                   
state of Alaska.  He discussed  the difficulties of filing an                                                                   
international lawsuit,  and noted that in 2001  Alaska, along                                                                   
with  the state  of Maine,  passed complimentary  legislation                                                                   
designed  to enhance  the states'  ability  to enforce  their                                                                   
escrow  laws.     He  added   that  in  2002,   the  National                                                                   
Association of  Attorneys General  formed a working  group to                                                                   
design  model  statutes  and   encourage  uniformity  between                                                                   
states.  He stated  that the  proposed  legislation, HB  224,                                                                   
resulted from this working group.                                                                                               
                                                                                                                                
Mr. Barnhill explained  that the statute establishes  a list,                                                                   
developed by the Department of  Revenue, of the manufacturers                                                                   
and brands  of cigarettes  allowed for sale  in the  state of                                                                   
Alaska.   He noted  that to  be on the  list, a  manufacturer                                                                   
must do  one of  two things:   either  certify annually  that                                                                   
they are  a participating  manufacturer under the  Settlement                                                                   
Agreement, or a non-participating  manufacturer in compliance                                                                   
with  state law.  A distributor  may  refer to  the list  and                                                                   
determine  which brands  they may  sell.  He  noted that  the                                                                   
legislation  also provides  for provision  of information  by                                                                   
manufacturers  in  order  to monitor  compliance.    It  also                                                                   
provides penalties for non-compliance,  and addresses special                                                                   
conditions for  foreign manufacturer  enforcement.   He added                                                                   
that  the bill  provides a  tax credit  for distributors  who                                                                   
purchase a brand  of cigarettes that are later  taken off the                                                                   
list for non-compliance.                                                                                                        
                                                                                                                                
Representative Stoltze  asked for information  about statutes                                                                   
exempting  tribal entities  from  paying  taxes on  cigarette                                                                   
sales.   Mr.   Barnhill   referred   to   national   research                                                                   
investigating  Internet  sites selling  tax-free  cigarettes.                                                                   
Representative  Stoltze  referred  to the  sale  of  tax-free                                                                   
tobacco on reservations.                                                                                                        
                                                                                                                                
JOHANNA D.  BALES, TAX AUDITOR,  DEPARTMENT OF  REVENUE noted                                                                   
that  she  coordinates  the cigarette  and  tobacco  products                                                                   
excise  tax program.   She  referred  to the  passage of  the                                                                   
Native Claims  Settlement Act in 1977, and  its establishment                                                                   
of  corporation  status  for  every tribe  in  the  state  of                                                                   
Alaska.   She noted  that the only  tribe with a  reservation                                                                   
status was the  Metlakatla Indian Community,  making them the                                                                   
only native tribe  in the state that can  purchase cigarettes                                                                   
without  paying  tax.    She noted  that  the  Department  of                                                                   
Revenue  had  negotiated  with   the  tribe  and  reached  an                                                                   
agreement,  whereby  the tribe  will  collect  and pay  state                                                                   
taxes  if  their  purchase  of  tobacco  products  exceeds  a                                                                   
certain amount.  She added that  the Klawock Indian Community                                                                   
maintained 2.5  acres of Indian Country Land,  which includes                                                                   
a smoke  shop where they  can sell cigarettes  without paying                                                                   
tax.  She  concluded that Alaska differed from  others states                                                                   
in this issue, and did not experience  the same difficulties.                                                                   
                                                                                                                                
In  response  to  a question  by  Representative  Meyer,  Mr.                                                                   
Barnhill clarified  that the zero impact fiscal  notes were a                                                                   
result of existing complimentary  legislation.  He added that                                                                   
the proposed  legislation simply  updates current  procedures                                                                   
and makes enforcement easier.                                                                                                   
                                                                                                                                
Vice-Chair Meyer  asked if there was legislation  considering                                                                   
placing  a  stamp on  cigarettes  to  indicate its  place  of                                                                   
purchase.     Mr.  Barnhill   noted  that  SB   168-CIGARETTE                                                                   
SALE/DISTRIBUTION  ["An Act  relating to   .  . . payment  of                                                                   
cigarette taxes through the use  of cigarette tax stamps; . .                                                                   
."] did propose this action.                                                                                                    
                                                                                                                                
Representative  Foster   MOVED  to  report  HB   224  out  of                                                                   
Committee  with individual  recommendations and  accompanying                                                                   
fiscal notes.  There being NO OBJECTION it was so ordered.                                                                      
                                                                                                                                
HB  224  was REPORTED  out  of  Committee  with a  "do  pass"                                                                   
recommendation  and  two  previously  published  zero  fiscal                                                                   
notes,  #1  from  the  Department  of Law  and  #2  from  the                                                                   
Department of Revenue.                                                                                                          
                                                                                                                                

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